COMTECH TELECOMMUNICATIONS CORP /DE/ - Quarter Report: 2019 April (Form 10-Q)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended April 30, 2019



	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 0-7928

(Exact name of registrant as specified in its charter)



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.

Yes

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

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

As of May 31, 2019, the number of outstanding shares of Common Stock, par value $0.10 per share, of the registrant was 24,137,882 shares.

Index



COMTECH TELECOMMUNICATIONS CORP. INDEX
			Page
PART I. FINANCIAL INFORMATION

	Item 1.	Condensed Consolidated Financial Statements	2

		Condensed Consolidated Balance Sheets - April 30, 2019 and July 31, 2018 (Unaudited)	2

		Condensed Consolidated Statements of Operations - Three and Nine Months Ended April 30, 2019 and 2018 (Unaudited)	3

		Condensed Consolidated Statements of Stockholders' Equity - Three and Nine Months Ended April 30, 2019 and 2018 (Unaudited)	4

		Condensed Consolidated Statements of Cash Flows - Nine Months Ended April 30, 2019 and 2018 (Unaudited)	6

		Notes to Condensed Consolidated Financial Statements (Unaudited)	8

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	34

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	67

	Item 4.	Controls and Procedures	67

PART II. OTHER INFORMATION

	Item 1.	Legal Proceedings	68

	Item 1A.	Risk Factors	68

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	68

	Item 4.	Mine Safety Disclosures	68

	Item 6.	Exhibits	69

		Signature Page	70

Index

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)



	April 30, 2019			July 31, 2018
Assets
Current assets:
Cash and cash equivalents	$	45,152,000		43,484,000
Accounts receivable, net	142,770,000			147,439,000
Inventories, net	83,034,000			75,076,000
Prepaid expenses and other current assets	18,263,000			13,794,000
Total current assets	289,219,000			279,793,000
Property, plant and equipment, net	29,388,000			28,987,000
Goodwill	310,247,000			290,633,000
Intangibles with finite lives, net	267,097,000			240,796,000
Deferred financing costs, net	3,311,000			2,205,000
Other assets, net	4,225,000			2,743,000
Total assets	$	903,487,000		845,157,000
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	37,225,000		43,928,000
Accrued expenses and other current liabilities	79,744,000			65,034,000
Dividends payable	2,405,000			2,356,000
Contract liabilities	40,759,000			34,452,000
Current portion of long-term debt	—			17,211,000
Current portion of capital lease and other obligations	1,030,000			1,836,000
Interest payable	515,000			499,000
Total current liabilities	161,678,000			165,316,000
Non-current portion of long-term debt, net	173,500,000			148,087,000
Non-current portion of capital lease and other obligations	435,000			765,000
Income taxes payable	54,000			2,572,000
Deferred tax liability, net	12,117,000			10,927,000
Long-term contract liabilities	10,037,000			7,689,000
Other liabilities	20,717,000			4,117,000
Total liabilities	378,538,000			339,473,000
Commitments and contingencies (See Note 19)
Stockholders’ equity:
Preferred stock, par value $0.10 per share; shares authorized and unissued 2,000,000	—			—
Common stock, par value $0.10 per share; authorized 100,000,000 shares; issued 39,171,199 shares and 38,860,571 shares at April 30, 2019 and July 31, 2018, respectively	3,917,000			3,886,000
Additional paid-in capital	546,198,000			538,453,000
Retained earnings	416,683,000			405,194,000
	966,798,000			947,533,000
Less:
Treasury stock, at cost (15,033,317 shares at April 30, 2019 and July 31, 2018)	(441,849,000		)	(441,849,000	)
Total stockholders’ equity	524,949,000			505,684,000
Total liabilities and stockholders’ equity	$	903,487,000		845,157,000

See accompanying notes to condensed consolidated financial statements.

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



	Three months ended April 30,				Nine months ended April 30,
	Three months ended April 30,				Nine months ended April 30,
	2019			2018	2019			2018
Net sales	$	170,448,000		147,854,000	$	495,425,000		403,154,000
Cost of sales	106,032,000			85,418,000	311,995,000			242,201,000
Gross profit	64,416,000			62,436,000	183,430,000			160,953,000

Expenses:
Selling, general and administrative	33,409,000			30,410,000	97,243,000			86,100,000
Research and development	13,471,000			12,778,000	40,664,000			39,963,000
Amortization of intangibles	4,536,000			5,269,000	13,113,000			15,806,000
Settlement of intellectual property litigation	—			—	(3,204,000		)	—
Acquisition plan expenses	1,704,000			—	4,612,000			—
	53,120,000			48,457,000	152,428,000			141,869,000

Operating income	11,296,000			13,979,000	31,002,000			19,084,000

Other expenses (income):
Interest expense	2,159,000			2,500,000	7,095,000			7,607,000
Write-off of deferred financing costs	—			—	3,217,000			—
Interest (income) and other	(22,000		)	198,000	(7,000		)	189,000

Income before provision for (benefit from) income taxes	9,159,000			11,281,000	20,697,000			11,288,000
Provision for (benefit from) income taxes	1,547,000			3,071,000	1,791,000			(11,023,000	)

Net income	$	7,612,000		8,210,000	$	18,906,000		22,311,000
Net income per share (See Note 6):
Basic	$	0.31		0.34	$	0.79		0.94
Diluted	$	0.31		0.34	$	0.78		0.93

Weighted average number of common shares outstanding – basic	24,192,000			23,834,000	24,074,000			23,819,000

Weighted average number of common and common equivalent shares outstanding – diluted	24,330,000			24,052,000	24,263,000			23,999,000

See accompanying notes to condensed consolidated financial statements.

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Unaudited)



	Three months ended April 30, 2019 and 2018
	Common Stock			Additional Paid-in Capital			Retained Earnings			Treasury Stock				Stockholders' Equity
	Shares	Amount		Additional Paid-in Capital			Retained Earnings			Shares	Amount			Stockholders' Equity
Balance as of January 31, 2018	38,653,430	$	3,865,000	$	534,224,000		$	394,381,000		15,033,317	$	(441,849,000	)	$	490,621,000
Equity-classified stock award compensation	—	—		1,104,000			—			—	—			1,104,000
Proceeds from exercises of stock options	4,900	—		130,000			—			—	—			130,000
Proceeds from issuance of employee stock purchase plan shares	11,608	2,000		220,000			—			—	—			222,000
Net settlement of stock-based awards	5,363	1,000		(58,000		)	—			—	—			(57,000		)
Cash dividends declared, net ($0.10 per share)	—	—		—			(2,354,000		)	—	—			(2,354,000		)
Accrual of dividend equivalents, net of reversal ($0.10 per share)	—	—		—			(92,000		)	—	—			(92,000		)
Net income	—	—		—			8,210,000			—	—			8,210,000
Balance as of April 30, 2018	38,675,301	$	3,868,000	$	535,620,000		$	400,145,000		15,033,317	$	(441,849,000	)	$	497,784,000

Balance as of January 31, 2019	38,950,547	$	3,895,000	$	539,273,000		$	411,558,000		15,033,317	$	(441,849,000	)	$	512,877,000
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.	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

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

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)

(Unaudited)



	Nine months ended April 30, 2019 and 2018
	Common Stock					Additional Paid-in Capital			Retained Earnings			Treasury Stock				Stockholders' Equity
	Shares		Amount			Additional Paid-in Capital			Retained Earnings			Shares	Amount			Stockholders' Equity
Balance as of July 31, 2017	38,619,467		$	3,862,000		$	533,001,000		$	385,136,000		15,033,317	$	(441,849,000	)	$	480,150,000
Equity-classified stock award compensation	—		—			2,931,000			—			—	—			2,931,000
Proceeds from exercises of stock options	4,900		—			130,000			—			—	—			130,000
Proceeds from issuance of employee stock purchase plan shares	35,830		4,000			615,000			—			—	—			619,000
Forfeiture of restricted stock	(10,254	)	(1,000		)	1,000			—			—	—			—
Net settlement of stock-based awards	25,358		3,000			(1,058,000		)	—			—	—			(1,055,000		)
Cash dividends declared, net ($0.30 per share)	—		—			—			(7,055,000		)	—	—			(7,055,000		)
Accrual of dividend equivalents, net of reversal ($0.30 per share)	—		—			—			(247,000		)	—	—			(247,000		)
Net income	—		—			—			22,311,000			—	—			22,311,000
Balance as of April 30, 2018	38,675,301		$	3,868,000		$	535,620,000		$	400,145,000		15,033,317	$	(441,849,000	)	$	497,784,000

Balance as of July 31, 2018	38,860,571		$	3,886,000		$	538,453,000		$	405,194,000		15,033,317	$	(441,849,000	)	$	505,684,000
Equity-classified stock award compensation	—		—			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 Technologies Inc.	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

See accompanying notes to condensed consolidated financial statements.

Index

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

	Nine months ended April 30,
	2019			2018
Cash flows from operating activities:
Net income	$	18,906,000		22,311,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of property, plant and equipment	8,618,000			9,833,000
Amortization of intangible assets with finite lives	13,113,000			15,806,000
Amortization of stock-based compensation	3,356,000			2,931,000
Amortization of deferred financing costs	916,000			1,646,000
Estimated contract settlement costs	6,351,000			—
Settlement of intellectual property litigation	(3,204,000		)	—
Write-off of deferred financing costs	3,217,000			—
Changes in other liabilities	(23,000		)	—
Loss on disposal of property, plant and equipment	40,000			77,000
Provision for allowance for doubtful accounts	854,000			412,000
Provision for excess and obsolete inventory	2,450,000			3,659,000
Deferred income tax expense (benefit)	3,885,000			(11,237,000	)
Changes in assets and liabilities, net of effects of business acquisitions:
Accounts receivable	10,970,000			(3,786,000	)
Inventories	(9,136,000		)	(19,610,000	)
Prepaid expenses and other current assets	(1,569,000		)	722,000
Other assets	(34,000		)	(205,000	)
Accounts payable	(8,611,000		)	310,000
Accrued expenses and other current liabilities	5,722,000			48,000
Contract liabilities	1,333,000			8,248,000
Other liabilities, non-current	377,000			(670,000	)
Interest payable	69,000			250,000
Income taxes payable	(3,757,000		)	(129,000	)
Net cash provided by operating activities	53,843,000			30,616,000
Cash flows from investing activities:
Payment for acquisition of Solacom Technologies Inc., net of cash acquired	(25,883,000		)	—
Payment for acquisition of the GD NG-911 business	(10,000,000		)	—
Purchases of property, plant and equipment	(6,388,000		)	(5,299,000	)
Net cash used in investing activities	(42,271,000		)	(5,299,000	)
Cash flows from financing activities:
Net borrowings of long-term debt under Credit Facility	173,500,000			—
Net (payments) borrowings under Revolving Loan portion of Prior Credit Facility	(48,603,000		)	1,001,000
Repayment of debt under Term Loan portion of Prior Credit Facility	(120,121,000		)	(14,657,000	)
Remittance of employees' statutory tax withholdings for stock awards	(5,032,000		)	(1,055,000	)
Cash dividends paid	(7,381,000		)	(7,173,000	)
Payment of deferred financing costs	(1,813,000		)	—
Repayment of principal amounts under capital lease and other obligations	(1,189,000		)	(1,853,000	)
Proceeds from issuance of employee stock purchase plan shares	709,000			619,000
Payment of shelf registration costs	(148,000		)	—
Proceeds from exercises of stock options	174,000			130,000
Net cash used in financing activities	(9,904,000		)	(22,988,000	)
Net increase in cash and cash equivalents	1,668,000			2,329,000
Cash and cash equivalents at beginning of period	43,484,000			41,844,000
Cash and cash equivalents at end of period	$	45,152,000		44,173,000
See accompanying notes to condensed consolidated financial statements. (Continued)

Index



COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (Unaudited)
	Nine months ended April 30,
	2019		2018
Supplemental cash flow disclosures:
Cash paid during the period for:
Interest	$	5,853,000	5,348,000
Income taxes, net	$	1,582,000	345,000

Non-cash investing and financing activities:
Cash dividends declared but unpaid (including dividend equivalents)	$	2,653,000	2,601,000
Accrued additions to property, plant and equipment	$	1,248,000	1,491,000
Capital lease and other obligations incurred	$	—	1,306,000
Common stock issued for acquisition of Solacom Technologies Inc.	$	5,606,000	—
Issuance (forfeiture) of restricted stock	$	1,000	(1,000	)

See accompanying notes to condensed consolidated financial statements.

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, 2019 and 2018 are unaudited. In the opinion of management, the information furnished reflects all material adjustments (which include normal recurring adjustments) necessary for a fair presentation of the results for the unaudited interim periods. Our results of operations for such periods are not necessarily indicative of the results of operations to be expected for the full fiscal year.

The preparation of our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the condensed consolidated financial statements, and the reported amounts of net sales and expenses during the reported period. Actual results may differ from those estimates.

Our condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements, filed with the Securities and Exchange Commission ("SEC"), for the fiscal year ended July 31, 2018 and the notes thereto contained in our Annual Report on Form 10-K, and all of our other filings with the SEC.

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

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

(2) 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 safety and security solutions.

The acquisition has a preliminary 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 at a volume weighted average stock price of $26.86. 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. The preliminary purchase price for accounting purposes is subject to finalization.

We are accounting for the acquisition of Solacom under the acquisition method of accounting in accordance with FASB ASC 805, "Business Combinations." The purchase price was allocated to the assets acquired and liabilities assumed, based on their preliminary fair value as of February 28, 2019, 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, 2019 include a nominal contribution from Solacom. Pro forma financial information is not disclosed, as the acquisition is not material.

Index

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 Solacom acquisition:



	February 28, 2019
Settled in cash	$	27,328,000
Settled in common stock issued by Comtech	5,606,000
Preliminary purchase price at fair value	$	32,934,000
Preliminary allocation of purchase price:
Cash and cash equivalents	$	1,445,000
Current assets, excluding cash acquired	9,425,000
Property, plant and equipment	777,000
Deferred tax assets, non-current	5,374,000
Accrued warranty obligations	(1,431,000		)
Current liabilities	(4,477,000		)
Contract liabilities, non-current	(1,604,000		)
Net tangible assets at preliminary fair value	$	9,509,000
Identifiable intangible assets, deferred taxes and goodwill:				Estimated Useful Lives
Technology	$	6,779,000		10 years
Customer relationships	7,007,000			20 years
Trade name	1,828,000			20 years
Deferred tax liabilities related to intangible assets acquired	(4,153,000		)
Goodwill	11,964,000			Indefinite
Preliminary allocation of purchase price	$	32,934,000

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 and 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 purchase price allocation, were synergies in products and technologies and the addition of a skilled, assembled workforce. This goodwill has been assigned to our Commercial 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 customary provisions in the purchase agreement related to adjustments to net working capital as of the acquisition date), a final assessment of accrued warranty obligations, income taxes and residual goodwill.

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 from GD ("the GD NG-911 business") has a preliminary cash purchase price of $10,000,000. 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 commenced the integration of this business into our Commercial Solutions segment’s safety and security technology solutions 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.

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

We are accounting 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 preliminary fair value as of April 29, 2019, 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 financial results for the three and nine months ended April 30, 2019 included only 2 days of contribution from the GD NG-911 business. Pro forma financial information is not disclosed, as the acquisition is not material.

The following table summarizes the preliminary fair value of the assets acquired and liabilities assumed in connection with the acquisition of the GD NG-911 business:



	April 29, 2019
Preliminary purchase price at fair value	$	10,000,000
Preliminary allocation of purchase price:
Current assets	$	5,790,000
Property, plant and equipment	646,000
Deferred tax assets, non-current	3,292,000
Accrued warranty obligations	(5,000,000		)
Current liabilities	(3,960,000		)
Net tangible assets at preliminary fair value	$	768,000
Identifiable intangibles, deferred taxes and goodwill:				Estimated Useful Lives
Customer relationships	$	20,300,000		10 years
Technology	3,500,000			15 years
Other liabilities	(21,700,000		)
Deferred tax liabilities related to intangibles	(518,000		)
Goodwill	7,650,000			Indefinite
Preliminary purchase price	$	10,000,000

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 and contracts was 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 know-how was based on the discounted capitalization of royalty expense saved because we now own the assets. The preliminary fair value of other liabilities was based on the difference in discounted cash flows related to remaining performance obligations under a certain acquired contract as compared to current market terms for similar arrangements that a market participant would expect. Other liabilities will be credited against cost of sales over the remaining performance of the contract, which is 5.25 years.

Among the factors contributing to the recognition of goodwill, as a component of the purchase price allocation, were synergies in solution offerings and the addition of a skilled, assembled workforce. We currently estimate that approximately $6,300,000 of goodwill resulting from the acquisition will be tax deductible. This goodwill has been assigned to our Commercial Solutions segment based on specific identification.

The allocation of the preliminary purchase price shown in the above table was based on 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 customary provisions in the asset purchase agreement related to adjustments to net working capital as of the acquisition date), the estimated fair value of intangible assets acquired, intangible liability assumed, a final assessment of accrued warranty obligations, income taxes and residual goodwill.

Index

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 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 nine months ended April 30, 2019, we adopted:


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

•

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

During the nine months ended April 30, 2019, the SEC issued Final Rule Release No. 33-10532 "Disclosure Update and Simplification," which revised certain of the SEC’s disclosure requirements that have become superseded in light of other SEC and or U.S. GAAP disclosure requirements. As a result of the final rule’s amendments, the SEC now requires a registrant to reconcile its changes in stockholders' equity for both the current and comparative interim and year-to-date periods, with subtotals. Our Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended April 30, 2019 and 2018 reflect our adoption of this final rule.

(4) Revenue

On August 1, 2018, we adopted ASU No. 2014-09 "Revenue from Contracts with Customers (Topic 606)" or "ASC 606" applying the modified retrospective transition method. Except for new presentation or disclosure requirements, the impact of adoption, both as of August 1, 2018 and for the three and nine months ended April 30, 2019, was not material to our business, results of operations or financial condition. As a practical expedient, we adopted the new standard only for existing contracts as of August 1, 2018. All periods prior to August 1, 2018 will continue to be reported under the accounting standards in effect in those periods. As a result of ASC 606, we made the following adjustments to our Condensed Consolidated Balance Sheet as of August 1, 2018:



	As reported at		Adoption of			Balance at
	July 31, 2018		ASC 606			August 1, 2018
Accrued expenses and other current liabilities⁽¹⁾	$	65,034,000	$	(2,079,000	)	$	62,955,000
Contract liabilities, current and non-current⁽²⁾	42,141,000		2,079,000			44,220,000

⁽¹⁾ See Note (9) - "Accrued Expenses and Other Current Liabilities" for further discussion of reclassification.

⁽²⁾ Formerly presented on the face of our Condensed Consolidated Balance Sheet as "Customer advances and deposits, current and non-current" prior to our adoption of ASC 606.

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

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

•

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

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

The cost-to-cost method is principally used to account for contracts in our command and control solutions and over-the-horizon microwave systems product lines and, to a lesser extent, certain location-based and messaging infrastructure contracts in our enterprise technology solutions product line. For service-based contracts in both our enterprise technology solutions and safety and security technology solutions product lines, we recognize revenue over time. These services are typically recognized as a series of services performed over the contract term using the straight-line method, or based on our customers’ actual usage of the networks and platforms which we provide.

•

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

Index

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 earth station product line (which includes satellite modems, traveling wave tube amplifiers ("TWTAs") and solid-state power amplifiers ("SSPAs")) and solid-state high-power narrow and broadband amplifiers. Point in time accounting is also applied to certain contracts in our command and control solutions product line. The contracts related to these product lines do not meet the requirements for over time revenue recognition because our customers cannot utilize the equipment for its intended purpose during any phase of our manufacturing process; customers do not simultaneously receive and or consume the benefits provided by our performance; customers do not control the asset (i.e., prior to delivery, customers cannot direct the use of the asset, sell or exchange the equipment, etc.); and, although many of our contracts have termination for convenience clauses and or an enforceable right to payment for performance completed to date, our performance creates an asset with an alternative use through the point of delivery.

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

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

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.

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,
	2019		2018		2019		2018
United States
U.S. government	38.9	%	37.4	%	42.7	%	34.0	%
Domestic	34.7	%	38.0	%	32.7	%	41.2	%
Total United States	73.6	%	75.4	%	75.4	%	75.2	%

International	26.4	%	24.6	%	24.6	%	24.8	%
Total	100.0	%	100.0	%	100.0	%	100.0	%

Sales to U.S. government customers include sales to the U.S. Department of Defense ("DoD"), intelligence and civilian agencies, as well as sales directly to or through prime contractors. Domestic sales include sales to commercial customers, as well as to U.S. state and local governments. Included in domestic sales, are sales to Verizon Communications Inc. ("Verizon"). Sales to Verizon were 9.2% and 9.5%, respectively, of consolidated net sales for the three and nine months ended April 30, 2019. Sales to Verizon were 9.8% and 10.6%, respectively, of consolidated net sales for the three and nine months ended April 30, 2018. International sales include sales to U.S. domestic companies for inclusion in products that are sold to international customers. Except for the U.S., no individual country (including sales to U.S. domestic companies for inclusion in products that are sold to a foreign country) represented more than 10% of consolidated net sales for the three and nine months ended April 30, 2019 and 2018.

The following tables summarize our disaggregation of revenue consistent with information reviewed by our chief operating decision-maker ("CODM") for the three and nine months ended April 30, 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, 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

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

The timing of revenue recognition, billings and collections results in receivables, unbilled receivables and contract liabilities on our Condensed Consolidated Balance Sheet. Under typical payment terms for our contracts accounted for over time, amounts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals (e.g., monthly) or upon achievement of contractual milestones. For certain contracts with provisions that are intended to protect customers in the event we do not satisfy our performance obligations, billings occur subsequent to revenue recognition, resulting in what we have historically presented as unbilled receivables. Contract assets increased $5,379,000 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, 2019. On large long term contracts, and for contracts with international customers that do not do business with us regularly, payment terms typically require advanced payments and deposits. Under ASC 606, payments received from customers in excess of revenue recognized to-date results in a contract liability. These contract liabilities are not considered to represent a significant financing component of the contract because we believe these cash advances and deposits are generally used to meet working capital demands which can be higher in the earlier stages of a contract. Also, advanced payments and deposits provide us with some measure of assurance that the customer will perform on its obligations under the contract. Under the typical payment terms for our contracts accounted for at a point in time, costs are accumulated in inventory until the time of billing, which generally coincides with revenue recognition. Contract liabilities increased $5,411,000 due to business combinations discussed in Note (2) - "Acquisitions". Of the total contract liabilities at August 1, 2018, $30,061,000 was recognized as revenue during the nine months ended April 30, 2019.

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

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

Remaining performance obligations represent the transaction price of firm orders for which work has not been performed as of the end of a fiscal period. Remaining performance obligations, which we refer to as backlog, exclude unexercised contract options and potential orders under indefinite delivery / indefinite quantity ("IDIQ") contracts. As of April 30, 2019, the aggregate amount of the transaction price allocated to remaining performance obligations was $747,130,000 (which represents the amount of our consolidated backlog). We expect that a significant portion of our remaining performance obligations at April 30, 2019 will be completed and recognized as revenue during the next twelve month period. During the three and nine months ended April 30, 2019, revenue recognized from performance obligations satisfied, or partially satisfied, in previous periods (for example due to changes in the transaction price) was not material.

(5) Fair Value Measurements and Financial Instruments

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

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

The fair value of our Credit Facility that we entered into on October 31, 2018 approximates its carrying amount due to its variable interest rate and pricing grid that is dependent upon our leverage ratio as of the end of each fiscal quarter. We believe the fair value of our non-current portion of capital lease and other obligations, which currently has a blended interest rate of approximately 7.0%, would not be materially different than its carrying value as of April 30, 2019.

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

The fair value of the non-current portion of our favorable AT&T warranty settlement would not be materially different than its carrying value as of as of April 30, 2019, given our belief that the present value of such liability reflects market participants' assumptions for a similar junior, unsecured debt instrument. See Note (9) - "Accrued Expenses and Other Current Liabilities" for further discussion of the favorable AT&T warranty settlement.

As of April 30, 2019 and July 31, 2018, other than the financial instruments discussed above, we had no other significant assets or liabilities included in our Condensed Consolidated Balance Sheets recorded at fair value, as such term is defined by FASB ASC 820.

(6) Earnings Per Share

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

There were no purchases of our common stock during the three or nine months ended April 30, 2019 or 2018. See Note (18) - "Stockholders’ Equity" for more information.

Weighted average stock options, RSUs and restricted stock outstanding of 1,674,000 and 1,505,000 for the three months ended April 30, 2019 and 2018, respectively, and 1,103,000 and 1,804,000 for the nine months ended April 30, 2019 and 2018, respectively, were not included in our diluted EPS calculation because their effect would have been anti-dilutive.

Our EPS calculations exclude 246,000 and 260,000 weighted average performance shares outstanding for the three months ended April 30, 2019 and 2018, respectively, and 242,000 and 257,000 for the nine months ended April 30, 2019 and 2018, respectively, as the performance conditions have not yet been satisfied. However, the compensation expense related to these awards is included in net income (the numerator) for EPS calculations for each respective period.

The following table reconciles the numerators and denominators used in the basic and diluted EPS calculations:



	Three months ended April 30,			Nine months ended April 30,
	2019		2018	2019		2018
Numerator:
Net income for basic calculation	$	7,612,000	8,210,000	$	18,906,000	22,311,000
Numerator for diluted calculation	$	7,612,000	8,210,000	$	18,906,000	22,311,000

Denominator:
Denominator for basic calculation	24,192,000		23,834,000	24,074,000		23,819,000
Effect of dilutive securities:
Stock-based awards	138,000		218,000	189,000		180,000
Denominator for diluted calculation	24,330,000		24,052,000	24,263,000		23,999,000

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

(7) Accounts Receivable

Accounts receivable consist of the following at:



	April 30, 2019		July 31, 2018
Receivables from commercial and international customers	$	85,140,000	83,411,000
Unbilled receivables from commercial and international customers	20,581,000		19,731,000
Receivables from the U.S. government and its agencies	36,744,000		26,251,000
Unbilled receivables from the U.S. government and its agencies	2,145,000		19,807,000
Total accounts receivable	144,610,000		149,200,000
Less allowance for doubtful accounts	1,840,000		1,761,000
Accounts receivable, net	$	142,770,000	147,439,000

Unbilled receivables as of April 30, 2019 relate to contracts-in-progress for which revenue has been recognized, but for which we have not yet earned the right to bill the customer for work performed to-date. Under ASC 606, which we adopted on August 1, 2018 (see Note (4) - "Revenue"), unbilled receivables constitute contract assets. Management estimates that substantially all amounts not yet billed at April 30, 2019 will be billed and collected within one year.

As of April 30, 2019, the U.S. government (and its agencies) and Verizon represented 26.9% and 10.7%, respectively, of total accounts receivable. As of July 31, 2018, the U.S. government (and its agencies) and Verizon represented 30.9% and 10.1%, respectively, of total accounts receivable.

(8) Inventories

Inventories consist of the following at:



	April 30, 2019		July 31, 2018
Raw materials and components	$	56,914,000	53,649,000
Work-in-process and finished goods	43,597,000		38,854,000
Total inventories	100,511,000		92,503,000
Less reserve for excess and obsolete inventories	17,477,000		17,427,000
Inventories, net	$	83,034,000	75,076,000

As of April 30, 2019 and July 31, 2018, the amount of inventory directly related to long-term contracts (including contracts-in-progress) was $2,513,000 and $1,249,000, respectively, and the amount of inventory related to contracts from third party commercial customers who outsource their manufacturing to us was $1,822,000 and $1,310,000, respectively.

(9) Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following at:



	April 30, 2019		July 31, 2018
Accrued wages and benefits	$	27,955,000	23,936,000
Accrued contract costs	11,747,000		10,016,000
Accrued warranty obligations	14,263,000		11,738,000
Accrued legal costs	3,195,000		6,179,000
Accrued commissions and royalties	4,964,000		4,654,000
Other	17,620,000		8,511,000
Accrued expenses and other current liabilities	$	79,744,000	65,034,000

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

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

Other accrued expenses as of April 30, 2019 include $634,000 for the current portion of facility exit costs related to the closure of a manufacturing facility, as discussed in more detail in Note (10) - "Cost Reduction Actions."

Accrued legal costs as of July 31, 2018 included $3,372,000 related to estimated costs associated with a certain TeleCommunication Systems, Inc. ("TCS") intellectual property matter. During the nine months ended April 30, 2019, this matter was resolved in our favor. As a result, we reduced such accrued legal costs and recorded a $3,204,000 benefit in the Condensed Consolidated Statement of Operations. See Note (19) - "Legal Proceedings and Other Matters" for additional information.

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

Accrued warranty obligations as of April 30, 2019 relate to estimated liabilities for assurance-type warranty coverage that we provide to our customers. We generally provide warranty coverage for some of our products for a period of at least one year from the date of delivery. We record a liability for estimated warranty expense based on historical claims, product failure rates, a consideration of contractual obligations, future costs to resolve software issues and other factors. Some of our product warranties are provided under long-term contracts, the costs of which are incorporated into our estimates of total contract costs.

Changes in our accrued warranty obligations during the nine months ended April 30, 2019 and 2018 were as follows:



	Nine months ended April 30,
	2019			2018
Balance at beginning of period	$	11,738,000		17,617,000
Reclass to contract liabilities as of August 1, 2018	(1,679,000		)	—
Provision for warranty obligations	1,320,000			4,292,000
Additions (in connection with acquisitions)	6,431,000			—
Charges incurred	(4,828,000		)	(6,311,000	)
Warranty settlement and reclass (see below)	1,281,000			(3,099,000	)
Balance at end of period	$	14,263,000		12,499,000

Our current accrued warranty obligations at April 30, 2019 and July 31, 2018 include $4,013,000 and $4,650,000, respectively, of warranty obligations for a small product line that we refer to as the TCS 911 call handling software solution. This solution was licensed to customers prior to our acquisition of TCS. During the nine months ended April 30, 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, 2019, the total present value of these monthly credits is $2,439,000, of which $1,691,000 is included in our current accrued warranty obligations and $748,000 is reflected in other liabilities (non-current) on our Condensed Consolidated Balance Sheet. In connection with this favorable settlement, during the nine months ended April 30, 2018, we recorded a benefit to cost of sales of $660,000.

In connection with our acquisition of Solacom and the GD NG-911 business, during the nine months ended April 30, 2019, we assumed warranty obligations related to certain contracts acquired. See Note (2) - "Acquisitions" for further information pertaining to these acquisitions.

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

(10) Cost Reduction Actions

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

During the nine months ended April 30, 2019, we made cash payments of $358,000 related to such facility exit cost accrual. As of April 30, 2019, the remaining estimated facility exit costs amounted to $1,015,000, of which $634,000 and $381,000, respectively, was included in "accrued expenses and other current liabilities" and "other liabilities (non-current)" on our Condensed Consolidated Balance Sheet. To-date, we have incurred an immaterial amount of severance and retention costs related to our Florida facilities consolidation.

During the second quarter of fiscal 2019, we began an evaluation and repositioning of our enterprise technology products in order to focus on providing higher margin solution offerings. This evaluation and repositioning continued during the third quarter and is ongoing. 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 ongoing repositioning, we recorded $2,465,000 and $6,351,000, respectively, of estimated contract settlement costs in our Commercial Solutions segment during the three and nine months ended April 30, 2019.

(11) Credit Facility

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

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

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

The proceeds of the new Credit Facility were used, in part, to repay in full the outstanding borrowings under the Prior Credit Facility, and additional proceeds of the Credit Facility are expected to be used by us for working capital and other general corporate purposes. As of April 30, 2019, the amount outstanding under our Credit Facility was $173,500,000, which is reflected in the non-current portion of long-term debt on our Condensed Consolidated Balance Sheet. At April 30, 2019, we had $1,754,000 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. Since October 31, 2018, we had outstanding balances under the new Credit Facility ranging from $150,000,000 to $184,000,000.

As of April 30, 2019, total net deferred financing costs related to the Credit Facility were $3,311,000 and are being amortized over the term of our Credit Facility through October 31, 2023.

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

Interest expense, including amortization of deferred financing costs, for the three months ended April 30, 2019 and 2018 was $2,067,000 and $2,351,000, respectively. The amount for the most recent fiscal quarter relates to our new Credit Facility; whereas, the amount in the comparable prior year period relates to our Prior Credit Facility. Interest expense, including amortization of deferred financing costs, for the nine months ended April 30, 2019 and 2018 was $6,780,000 and $7,166,000, respectively. The amount for the most recent fiscal year-to-date period relates to both our Prior Credit Facility and new Credit Facility; whereas, the amount in the comparable prior year period relates only to our Prior Credit Facility. Our blended interest rate approximated 5.00% and 5.49%, respectively, for the three months ended April 30, 2019 and 2018, and approximated 5.36% and 5.29%, respectively, for the nine months ended April 30, 2019 and 2018.

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

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

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

As of April 30, 2019, our Secured Leverage Ratio was 1.77x 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, 2019 was 12.46x 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.

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

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

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



	July 31, 2018
Term Loan Facility	$	120,121,000
Less unamortized deferred financing costs related to Term Loan Facility	3,427,000
Term Loan Facility, net	116,694,000
Revolving Loan Facility	48,604,000
Amount outstanding under Prior Credit Facility, net	165,298,000
Less current portion of long-term debt	17,211,000
Non-current portion of long-term debt	$	148,087,000

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

(12) Capital Lease and Other Obligations

We lease certain equipment under capital leases. As of April 30, 2019 and July 31, 2018, the net book value of the leased assets which collateralize the capital lease and other obligations was $1,130,000 and $2,547,000, respectively, and consisted primarily of machinery and equipment. Depreciation of leased assets is included in depreciation expense.

As of April 30, 2019, our capital lease and other obligations reflect a blended interest rate of approximately 7.0%. Our capital leases generally contain provisions whereby we can purchase the equipment at the end of the lease for a one dollar buyout.

Future minimum payments under capital lease and other obligations consisted of the following at April 30, 2019:



Remainder of fiscal 2019	$	733,000
Fiscal 2020	780,000
Fiscal 2021 and beyond	—
Total minimum lease payments	1,513,000
Less: amounts representing interest	48,000
Present value of net minimum lease payments	1,465,000
Current portion of capital lease and other obligations	1,030,000
Non-current portion of capital lease and other obligations	$	435,000

(13) Income Taxes

On December 22, 2017, H.R.1, also known as the Tax Cuts and Jobs Act ("Tax Reform"), was enacted in the U.S. Tax Reform significantly lowered the amount of our current and future income tax expense primarily due to the reduction in the U.S. statutory income tax rate from 35.0% to 21.0%. This provision went into effect on January 1, 2018 and required us to remeasure our deferred tax assets and liabilities. In fiscal 2019 and beyond, Tax Reform will result in the loss of our ability to take the domestic production activities deduction, which has been repealed, and is also likely to result in lower tax deductions for certain executive compensation expenses.

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

For fiscal 2018, we were subject to a 35.0% statutory income tax rate with respect to the period August 1, 2017 through December 31, 2017 and a 21.0% statutory income tax rate with respect to the period January 1, 2018 through July 31, 2018, or a blended statutory income tax rate for fiscal 2018 of approximately 27.0%. As such, our effective tax rate for accounting purposes in fiscal 2018, excluding discrete items, was 27.0%.

In connection with Tax Reform, during the nine months ended April 30, 2018, we recorded an initial estimated net discrete tax benefit of $14,071,000, primarily related to the remeasurement of deferred tax liabilities associated with non-deductible amortization related to intangible assets. This remeasurement was recorded pursuant to ASC 740 "Income Taxes" and SEC Staff Accounting Bulletin ("SAB") 118, using estimates based on reasonable and supportable assumptions and available information as of such reporting date. In the event the Internal Revenue Service ("IRS") issues clarifying or interpretive guidance related to Tax Reform, it may result in a change to our estimated income tax.

At April 30, 2019 and July 31, 2018, total unrecognized tax benefits were $6,987,000 and $9,339,000, respectively, including interest of $15,000 and $202,000, respectively. At April 30, 2019 and July 31, 2018, $54,000 and $2,572,000, respectively, of our unrecognized tax benefits were recorded as non-current income taxes payable on our Condensed Consolidated Balance Sheets. The remaining unrecognized tax benefits of $6,933,000 and $6,767,000 at April 30, 2019 and July 31, 2018, respectively, were presented as an offset to the associated non-current deferred tax assets on our Condensed Consolidated Balance Sheets. Of the total unrecognized tax benefits, $6,426,000 and $8,563,000, at April 30, 2019 and July 31, 2018, respectively, net of the reversal of the federal benefit recognized as a deferred tax asset relating to state reserves, would favorably impact our effective tax rate, if recognized. Unrecognized tax benefits result from income tax positions taken or expected to be taken on our income tax returns for which a tax benefit has not been recorded in our condensed consolidated financial statements. Our policy is to recognize interest and penalties relating to uncertain tax positions in income tax expense.

During the nine months ended April 30, 2019, the IRS finalized its audit of our federal income tax return for fiscal 2016 without assessing additional taxes. Our federal income tax returns for fiscal 2017 and 2018 are subject to potential future IRS audit. None of our state income tax returns prior to fiscal 2014 are subject to audit. TCS's federal income tax returns for tax year 2015 and the tax period from January 1, 2016 to February 23, 2016, the date we acquired TCS, are subject to potential future IRS audit. None of TCS's state income tax returns prior to calendar year 2014 are subject to audit. Future tax assessments or settlements could have a material adverse effect on our consolidated results of operations and financial condition.

(14) Stock-Based Compensation

Overview

We issue stock-based awards to certain of our employees and our Board of Directors pursuant to our 2000 Stock Incentive Plan, as amended, (the "Plan") and our 2001 Employee Stock Purchase Plan, as amended and restated effective December 4, 2018 (the "ESPP"), and recognize related stock-based compensation in our condensed consolidated financial statements. The Plan provides for the granting to employees and consultants of Comtech (including prospective employees and consultants): (i) incentive and non-qualified stock options, (ii) restricted stock units ("RSUs"), (iii) RSUs with performance measures (which we refer to as "performance shares"), (iv) restricted stock, (v) stock units (reserved for issuance to non-employee directors) and share units (reserved for issuance to employees) (collectively, "share units") and (vi) stock appreciation rights ("SARs"), among other types of awards. Our non-employee directors are eligible to receive non-discretionary grants of stock-based awards, subject to certain limitations.

As of April 30, 2019, the aggregate number of shares of common stock which may be issued, pursuant to the Plan, may not exceed 10,362,500. Stock options granted may not have a term exceeding ten years or, in the case of an incentive stock award granted to a stockholder who owns stock representing more than 10.0% of the voting power, no more than five years. We expect to settle all outstanding awards under the Plan and employee purchases under the ESPP with the issuance of new shares of our common stock.

As of April 30, 2019, we had granted stock-based awards pursuant to the Plan representing the right to purchase and/or acquire an aggregate of 8,312,169 shares (net of 3,964,101 expired and canceled awards), of which an aggregate of 5,881,783 have been exercised or settled.

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

As of April 30, 2019, the following stock-based awards, by award type, were outstanding:



Stock options	1,575,555
Performance shares	261,019
RSUs and restricted stock	438,006
Share units	155,806
Total	2,430,386

Our ESPP provides for the issuance of up to 1,050,000 shares of our common stock. Our ESPP is intended to provide our eligible employees the opportunity to acquire our common stock at 85% of fair market value at the date of issuance. Through April 30, 2019, we have cumulatively issued 775,770 shares of our common stock to participating employees in connection with our ESPP.

Stock-based compensation for awards issued is reflected in the following line items in our Condensed Consolidated Statements of Operations:



	Three months ended April 30,					Nine months ended April 30,
	2019			2018		2019			2018
Cost of sales	$	52,000		55,000		$	170,000		146,000
Selling, general and administrative expenses	1,004,000			976,000		2,960,000			2,584,000
Research and development expenses	63,000			73,000		226,000			201,000
Stock-based compensation expense before income tax benefit	1,119,000			1,104,000		3,356,000			2,931,000
Estimated income tax benefit	(244,000		)	(240,000	)	(732,000		)	(734,000	)
Net stock-based compensation expense	$	875,000		864,000		$	2,624,000		2,197,000

Stock-based compensation for equity-classified awards is measured at the date of grant, based on an estimate of the fair value of the award and is generally expensed over the vesting period of the award. At April 30, 2019, unrecognized stock-based compensation of $8,934,000, net of estimated forfeitures of $858,000, is expected to be recognized over a weighted average period of 2.9 years. Total stock-based compensation capitalized and included in ending inventory at both April 30, 2019 and July 31, 2018 was $48,000. There are no liability-classified stock-based awards outstanding as of April 30, 2019 or July 31, 2018.

Stock-based compensation expense (benefit), by award type, is summarized as follows:



	Three months ended April 30,					Nine months ended April 30,
	2019			2018		2019			2018
Stock options	$	174,000		309,000		$	526,000		845,000
Performance shares	374,000			363,000		1,166,000			846,000
RSUs and restricted stock	515,000			376,000		1,630,000			1,150,000
ESPP	56,000			56,000		164,000			152,000
Share units	—			—		(130,000		)	(62,000	)
Stock-based compensation expense before income tax benefit	1,119,000			1,104,000		3,356,000			2,931,000
Estimated income tax benefit	(244,000		)	(240,000	)	(732,000		)	(734,000	)
Net stock-based compensation expense	$	875,000		864,000		$	2,624,000		2,197,000

ESPP stock-based compensation expense primarily relates to the 15% discount offered to participants in the ESPP. During the nine months ended April 30, 2019 and 2018, we recorded benefits of $130,000 and $62,000, respectively, which primarily represents the recoupment of certain share units.

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

The estimated income tax benefit as shown in the above table was computed using income tax rates expected to apply when the awards are settled. Such deferred tax asset was recorded net as part of our non-current deferred tax liability on our Condensed Consolidated Balance Sheet as of April 30, 2019 and July 31, 2018. The actual income tax benefit recognized for tax reporting is based on the fair market value of our common stock at the time of settlement and can significantly differ from the estimated income tax benefit recorded for financial reporting.

Stock Options

The following table summarizes the Plan's activity during the nine months ended April 30, 2019:



	Awards (in Shares)		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
Outstanding at July 31, 2018	1,668,975		$	28.72
Exercised	(78,930	)	28.37
Outstanding at October 31, 2018	1,590,045		28.74
Expired/canceled	(7,850	)	29.30
Outstanding at January 31, 2019	1,582,195		28.74
Expired/canceled	(6,640	)	28.73
Outstanding at April 30, 2019	1,575,555		$	28.74	3.76	$	50,000

Exercisable at April 30, 2019	1,386,235		$	28.71	3.45	$	25,000

Vested and expected to vest at April 30, 2019	1,547,363		$	28.73	3.72	$	44,000

Stock options outstanding as of April 30, 2019 have exercise prices ranging from $20.90 to $33.94, representing the fair market value of our common stock on the date of grant, a contractual term of five or ten years and a vesting period of three or five years. There were no stock options exercised during the three months ended April 30, 2019. The total intrinsic value relating to stock options exercised during the nine months ended April 30, 2019 was $561,000 and for the three and nine months ended April 30, 2018 was $225,000, respectively.

During the nine months ended April 30, 2019, at the election of certain holders of vested stock options, 72,830 stock options were net settled upon exercise. As a result, 9,345 net shares of our common stock were issued during the nine months ended April 30, 2019 after reduction of shares retained to satisfy the exercise price and minimum statutory tax withholding requirements.

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

Performance Shares, RSUs, Restricted Stock and Share Unit Awards

The following table summarizes the Plan's activity relating to performance shares, RSUs, restricted stock and share units:



	Awards (in Shares)		Weighted Average Grant Date Fair Value		Aggregate Intrinsic Value
Outstanding at July 31, 2018	818,438		$	19.78
Granted	177,908		34.27
Settled	(121,790	)	21.08
Forfeited	(17,659	)	27.23
Outstanding at October 31, 2018	856,897		22.44
Granted	2,599		25.01
Settled	(526	)	11.40
Forfeited	(1,801	)	22.70
Outstanding at January 31, 2019	857,169		22.46
Granted	2,514		24.95
Settled	(1,130	)	17.35
Forfeited	(3,722	)	21.39
Outstanding at April 30, 2019	854,831		$	22.48	$	20,114,000

Vested at April 30, 2019	216,718		$	27.71	$	5,099,000

Vested and expected to vest at April 30, 2019	816,925		$	22.67	$	19,222,000

The total intrinsic value relating to fully-vested awards settled during the three and nine months ended April 30, 2019 was $28,000 and $4,252,000, respectively. The total intrinsic value relating to fully-vested awards settled during the three and nine months ended April 30, 2018 was $17,000 and $1,964,000, respectively.

The performance shares granted to employees since fiscal 2014 principally vest over a three-year performance period, if pre-established performance goals are attained or as specified pursuant to the Plan and related agreements. As of April 30, 2019, the number of outstanding performance shares included in the above table, and the related compensation expense prior to consideration of estimated pre-vesting forfeitures, assume achievement of the pre-established goals at a target level.

RSUs and restricted stock granted to non-employee directors have a vesting period of three years and are convertible into shares of our common stock generally at the time of termination, on a one-for-one basis for no cash consideration, or earlier under certain circumstances. RSUs granted to employees have a vesting period of five years and are convertible into shares of our common stock, generally at the time of vesting, on a one-for-one basis for no cash consideration.

Share units granted prior to July 31, 2017 were vested when issued and are convertible into shares of our common stock, generally at the time of termination, on a one-for-one basis for no cash consideration, or earlier under certain circumstances. Share units granted on or after July 31, 2017 were granted to certain employees in lieu of non-equity incentive compensation and are convertible into shares of our common stock on the one-year anniversary of the respective grant date. Cumulatively through April 30, 2019, 270,979 share units granted have been settled.

The fair value of performance shares, RSUs, restricted stock and share units is determined using the closing market price of our common stock on the date of grant, less the present value of any estimated future dividend equivalents such awards are not entitled to receive and an applicable estimated discount for post vesting restrictions. RSUs, performance shares and restricted stock granted since fiscal 2013 are entitled to dividend equivalents unless forfeited before vesting occurs. Share units granted since fiscal 2014 are entitled to dividend equivalents while the underlying shares are unissued.

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

Dividend equivalents are subject to forfeiture, similar to the terms of the underlying stock-based awards, and are payable in cash generally at the time of settlement of the underlying shares into shares of our common stock. During the three and nine months ended April 30, 2019, we accrued $82,000 and $248,000, respectively, of dividend equivalents (net of forfeitures) and paid out $1,000 and $261,000, respectively. Accrued dividend equivalents were recorded as a reduction to retained earnings. As of April 30, 2019 and July 31, 2018, accrued dividend equivalents were $700,000 and $713,000, respectively.

With respect to the actual settlement of stock-based awards for income tax reporting, during the three and nine months ended April 30, 2019, we recorded an income tax benefit of $52,000 and $505,000, respectively, and during the three and nine months ended April 30, 2018, we recorded an income tax expense of $25,000 and $96,000, respectively. Such income tax expense generally relates to the reversal of deferred tax assets associated with expired and unexercised stock-based awards and any net income tax shortfalls upon settlement. Such income tax benefit generally relates to any net excess income tax benefits upon settlement.

(15) Segment Information

Reportable operating segments are determined based on Comtech’s management approach. The management approach, as defined by FASB ASC 280 "Segment Reporting" is based on the way that the CODM organizes the segments within an enterprise for making decisions about resources to be allocated and assessing their performance. Our CODM, for purposes of FASB ASC 280, is our Chief Executive Officer and President.

Our Commercial Solutions segment serves commercial customers and smaller government customers, such as state and local governments, that require advanced communication technologies to meet their needs. This segment also serves certain large government customers (including the U.S. government) that have requirements for off-the-shelf commercial equipment. We believe this segment is a leading provider of satellite communications (such as satellite earth station modems and TWTAs), public safety systems (such as NG-911 technologies) and enterprise application technologies (such as messaging and trusted location-based technologies).

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

Our CODM primarily uses a metric that we refer to as Adjusted EBITDA to measure an operating segment’s performance and to make decisions about resources to be allocated. Our Adjusted EBITDA metric for the Commercial Solutions and Government Solutions segments do not consider any allocation of indirect expenses, or any of the following: income taxes, interest (income) and other, interest expense, write-off of deferred financing costs, amortization of stock-based compensation, amortization of intangible assets, depreciation expense, estimated contract settlement costs, facility exit costs, settlement of intellectual property litigation, acquisition plan expenses or strategic alternatives analysis expenses and other expenses that relate to our Unallocated segment. These items, while periodically affecting our results, may vary significantly from period to period and may have a disproportionate effect in a given period, thereby affecting the comparability of results. Any amounts shown in the Adjusted EBITDA calculation for our Commercial Solutions and Government Solutions segments are directly attributable to those segments. Our Adjusted EBITDA is also used by our management in assessing the Company's operating results. Although closely aligned, the Company's definition of Adjusted EBITDA is different than the Consolidated EBITDA (as such term is defined in our Credit Facility) utilized for financial covenant calculations and also may differ from the definition of EBITDA or Adjusted EBITDA used by other companies and, therefore, may not be comparable to similarly titled measures used by other companies.

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

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



	Three months ended April 30, 2019
	Commercial Solutions		Government Solutions		Unallocated		Total
Net sales	$	89,600,000	80,848,000		—		$	170,448,000
Operating income (loss)	$	8,126,000	10,053,000		(6,883,000	)	$	11,296,000

Net income (loss)	$	8,086,000	10,073,000		(10,547,000	)	$	7,612,000
Provision for income taxes	10,000		—		1,537,000		1,547,000
Interest (income) and other expense	9,000		(21,000	)	(10,000	)	(22,000		)
Interest expense	21,000		1,000		2,137,000		2,159,000
Amortization of stock-based compensation	—		—		1,119,000		1,119,000
Amortization of intangibles	3,692,000		844,000		—		4,536,000
Depreciation	2,374,000		367,000		177,000		2,918,000
Estimated contract settlement costs	2,465,000		—		—		2,465,000
Acquisition plan expenses	—		—		1,704,000		1,704,000
Adjusted EBITDA	$	16,657,000	11,264,000		(3,883,000	)	$	24,038,000

Purchases of property, plant and equipment	$	1,730,000	296,000		181,000		$	2,207,000
Long-lived assets acquired in connection with the acquisitions of Solacom and the GD NG-911 business	$	60,451,000	—		—		$	60,451,000
Total assets at April 30, 2019	$	665,499,000	200,442,000		37,546,000		$	903,487,000



	Three months ended April 30, 2018
		Commercial Solutions		Government Solutions	Unallocated		Total
Net sales		$	89,936,000	57,918,000	—		$	147,854,000
Operating income (loss)		$	13,282,000	6,048,000	(5,351,000	)	$	13,979,000

Net income (loss)		$	12,938,000	5,975,000	(10,703,000	)	$	8,210,000
Provision for income taxes		210,000		—	2,861,000		3,071,000
Interest (income) and other expense		110,000		73,000	15,000		198,000
Interest expense		24,000		—	2,476,000		2,500,000
Amortization of stock-based compensation		—		—	1,104,000		1,104,000
Amortization of intangibles		4,425,000		844,000	—		5,269,000
Depreciation		2,329,000		573,000	268,000		3,170,000
Adjusted EBITDA		$	20,036,000	7,465,000	(3,979,000	)	$	23,522,000

Purchases of property, plant and equipment		$	2,140,000	217,000	106,000		$	2,463,000
Total assets at April 30, 2018		$	615,643,000	177,495,000	40,934,000		$	834,072,000

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)



	Nine months ended April 30, 2019
	Commercial Solutions		Government Solutions		Unallocated		Total
Net sales	$	254,308,000	241,117,000		—		$	495,425,000
Operating income (loss)	$	23,942,000	24,480,000		(17,420,000	)	$	31,002,000

Net income (loss)	$	23,783,000	24,505,000		(29,382,000	)	$	18,906,000
Provision for income taxes	65,000		—		1,726,000		1,791,000
Interest (income) and other expense	32,000		(33,000	)	(6,000	)	(7,000		)
Write-off of deferred financing costs	—		—		3,217,000		3,217,000
Interest expense	62,000		8,000		7,025,000		7,095,000
Amortization of stock-based compensation	—		—		3,356,000		3,356,000
Amortization of intangibles	10,581,000		2,532,000		—		13,113,000
Depreciation	6,898,000		1,113,000		607,000		8,618,000
Estimated contract settlement costs	6,351,000		—		—		6,351,000
Settlement of intellectual property litigation	—		—		(3,204,000	)	(3,204,000		)
Acquisition plan expenses	—		—		4,612,000		4,612,000
Facility exit costs	—		1,373,000		—		1,373,000
Adjusted EBITDA	$	47,772,000	29,498,000		(12,049,000	)	$	65,221,000

Purchases of property, plant and equipment	$	4,593,000	1,357,000		438,000		$	6,388,000
Long-lived assets acquired in connection with the acquisitions of Solacom and the GD NG-911 business	$	60,451,000	—		—		$	60,451,000
Total assets at April 30, 2019	$	665,499,000	200,442,000		37,546,000		$	903,487,000



	Nine months ended April 30, 2018
		Commercial Solutions		Government Solutions	Unallocated		Total
Net sales		$	251,874,000	151,280,000	—		$	403,154,000
Operating income (loss)		$	26,996,000	5,108,000	(13,020,000	)	$	19,084,000

Net income (loss)		$	26,598,000	5,020,000	(9,307,000	)	$	22,311,000
Provision for (benefit from) income taxes		209,000		—	(11,232,000	)	(11,023,000		)
Interest (income) and other expense		100,000		85,000	4,000		189,000
Interest expense		89,000		3,000	7,515,000		7,607,000
Amortization of stock-based compensation		—		—	2,931,000		2,931,000
Amortization of intangibles		13,274,000		2,532,000	—		15,806,000
Depreciation		7,229,000		1,777,000	827,000		9,833,000
Adjusted EBITDA		$	47,499,000	9,417,000	(9,262,000	)	$	47,654,000

Purchases of property, plant and equipment		$	4,517,000	499,000	283,000		$	5,299,000
Total assets at April 30, 2018		$	615,643,000	177,495,000	40,934,000		$	834,072,000

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

Unallocated expenses result from corporate expenses such as executive compensation, accounting, legal and other regulatory compliance related costs and also includes all of our amortization of stock-based compensation. During the three and nine months ended April 30, 2019, unallocated expenses also include $1,704,000 and $4,612,000, respectively, of acquisition plan expenses primarily related to our acquisitions of Solacom and the GD NG-911 business, which we believe will further complement our product offerings. See Note (2) - "Acquisitions" for further information. There is no certainty that our acquisition plan efforts will be successful. In addition, offsetting unallocated expenses for the nine months ended April 30, 2019 is a $3,204,000 benefit resulting from a favorable ruling of the U.S. Court of Appeals for the Federal Circuit related to a legacy TCS intellectual property matter. See Note (19) - "Legal Proceedings and Other Matters" for further information.

Interest expenses in the tables above relate to our Prior Credit Facility and new Credit Facility and includes amortization of deferred financing costs. In addition, during the three months ended October 31, 2018, we recorded a $3,217,000 loss from the write-off of deferred financing costs primarily related to the Term Loan Facility portion of our Prior Credit Facility. See Note (11) - "Credit Facility" for further discussion.

Intersegment sales for the three months ended April 30, 2019 and 2018 by the Commercial Solutions segment to the Government Solutions segment were $1,413,000 and $2,664,000, respectively. Intersegment sales for the nine months ended April 30, 2019 and 2018 by the Commercial Solutions segment to the Government Solutions segment were $14,515,000 and $7,613,000, respectively. There were nominal sales by the Government Solutions segment to the Commercial Solutions segment for these periods. All intersegment sales are eliminated in consolidation and are excluded from the tables above.

Unallocated assets at April 30, 2019 consist principally of cash and cash equivalents, income taxes receivable, corporate property, plant and equipment and deferred financing costs. Substantially all of our long-lived assets are located in the U.S.

(16) Goodwill

The following table represents goodwill by reportable operating segment, including the changes in the net carrying value of goodwill during the nine months ended April 30, 2019:



	Commercial Solutions		Government Solutions	Total
Balance as of July 31, 2018	$	231,440,000	59,193,000	$	290,633,000
Addition resulting from Solacom acquisition	11,964,000		—	11,964,000
Addition resulting from the acquisition of the GD NG-911 business	7,650,000		—	7,650,000
Balance as of April 30, 2019	$	251,054,000	59,193,000	$	310,247,000

As discussed further in Note (2) -"Acquisitions," the goodwill resulting from the acquisitions of Solacom and the GD NG-911 business was based upon preliminary valuation and estimates and assumptions that are subject to change within the purchase price allocation period (generally one year from the acquisition date).

In accordance with FASB ASC 350 "Intangibles - Goodwill and Other," we perform a goodwill impairment analysis at least annually (in the first quarter of each fiscal year), unless indicators of impairment exist in interim periods. If we fail the quantitative assessment of goodwill impairment ("quantitative assessment"), we would be required to recognize an impairment loss equal to the amount that a reporting unit's carrying value exceeded its fair value; however, any loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

On August 1, 2018 (the first day of our fiscal 2019), we performed our annual quantitative assessment using market participant assumptions to determine if the fair value of each of our reporting units with goodwill exceeded its carrying value. In making this assessment, we considered, among other things, expectations of projected net sales and cash flows, assumptions impacting the weighted average cost of capital, trends in trading multiples of comparable companies, changes in our stock price and changes in the carrying values of our reporting units with goodwill. We also considered overall business conditions.

In performing the quantitative assessment, we estimated the fair value of each of our reporting units using a combination of the income and market approaches. The income approach, also known as the discounted cash flow ("DCF") method, utilizes the present value of cash flows to estimate fair value. The future cash flows for our reporting units were projected based on our estimates, at that time, of future revenues, operating income and other factors (such as working capital and capital expenditures). For purposes of conducting our impairment analysis, we assumed revenue growth rates and cash flow projections that are below our actual long-term expectations. The discount rates used in our DCF method were based on a weighted-average cost of capital ("WACC") determined from relevant market comparisons, adjusted upward for specific reporting unit risks (primarily the uncertainty of achieving projected operating cash flows). A terminal value growth rate was applied to the final year of the projected period and reflected our estimate of stable, perpetual growth. We then calculated a present value of the respective cash flows for each reporting unit to arrive at an estimate of fair value under the income approach. Under the market approach, we estimated a fair value based on comparable companies' market multiples of revenues and earnings before interest, taxes, depreciation and amortization and factored in a control premium. Finally, we compared our estimates of fair values to our August 1, 2018 total public market capitalization and assessed implied control premiums based on our common stock price of $33.70 as of August 1, 2018.

Based on our quantitative evaluation, we determined that our Commercial Solutions and Government Solutions reporting units had estimated fair values in excess of their carrying values of at least 42.5% and 105.5%, respectively, and concluded that our goodwill was not impaired and that neither of our two reporting units was at risk of failing the quantitative assessment. It is possible that, during fiscal 2019 or beyond, business conditions (both in the U.S. and internationally) could deteriorate from the current state, our current or prospective customers could materially postpone, reduce or even forgo purchases of our products and services to a greater extent than we currently anticipate, or our common stock price could decline. A significant decline in our customers' spending that is greater than we anticipate or a shift in funding priorities may also have a negative effect on future orders, sales, income and cash flows and we might be required to perform a quantitative assessment during fiscal 2019 or beyond. If assumed net sales and cash flow projections are not achieved in future periods or our common stock price significantly declines from current levels, our Commercial Solutions and Government Solutions reporting units could be at risk of failing the quantitative assessment and goodwill assigned to the respective reporting units could be impaired.

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

(17) Intangible Assets

Intangible assets with finite lives are as follows:



	As of April 30, 2019
	Weighted Average Amortization Period	Gross Carrying Amount		Accumulated Amortization	Net Carrying Amount
Customer relationships	20.5	$	276,834,000	63,274,000	$	213,560,000
Technologies	12.7	92,649,000		58,095,000	34,554,000
Trademarks and other	16.7	31,026,000		12,043,000	18,983,000
Total		$	400,509,000	133,412,000	$	267,097,000



	As of July 31, 2018
	Weighted Average Amortization Period	Gross Carrying Amount		Accumulated Amortization	Net Carrying Amount
Customer relationships	21.0	$	249,831,000	55,350,000	$	194,481,000
Technologies	12.8	82,370,000		54,386,000	27,984,000
Trademarks and other	16.4	28,894,000		10,563,000	18,331,000
Total		$	361,095,000	120,299,000	$	240,796,000

The weighted average amortization period in the above table excludes fully amortized intangible assets.

Amortization expense for the three months ended April 30, 2019 and 2018 was $4,536,000 and $5,269,000, respectively. Amortization expense for the nine months ended April 30, 2019 and 2018 was $13,113,000 and $15,806,000, respectively.

As further discussed in Note (2) -"Acquisitions," intangible assets as of April 30, 2019 include recently acquired intangibles resulting from the acquisitions of Solacom and the GD NG-911 business.

The estimated amortization expense consists of the following for the fiscal years ending July 31:



2019	$	18,320,000
2020	20,700,000
2021	19,563,000
2022	18,322,000
2023	18,322,000

We review net intangible assets with finite lives for impairment when an event occurs indicating the potential for impairment. No such event has occurred during the nine months ended April 30, 2019. We believe that the carrying values of our net intangible assets were recoverable as of April 30, 2019. Any impairment charges that we may record in the future could be material to our results of operations and financial condition.

(18) Stockholders’ Equity

Sale of Common Stock

In connection with an original $175,000,000 shelf registration filed with the SEC on December 15, 2015, we sold 7,145,000 shares of our common stock in a public offering at a price of $14.00 per share in June 2016, resulting in proceeds to us of $95,029,000, net of underwriting discounts and commissions. In December 2018, we filed a new $400,000,000 shelf registration with the SEC for the sale of various types of securities, including debt. The new shelf registration was declared effective by the SEC as of December 14, 2018. To-date, we have not issued any securities related to our new $400,000,000 shelf registration.

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

Stock Repurchase Program

As of April 30, 2019 and June 5, 2019, we were authorized to repurchase up to an additional $8,664,000 of our common stock, pursuant to our current $100,000,000 stock repurchase program. Our stock repurchase program has no time restrictions and repurchases may be made in open-market or privately negotiated transactions and may be made pursuant to SEC Rule 10b5-1 trading plans. There were no repurchases made during the three or nine months ended April 30, 2019 or 2018.

Dividends

Since September 2010, we have paid quarterly dividends pursuant to an annual targeted dividend amount that was established by our Board of Directors. On September 26, 2018, December 6, 2018 and March 6, 2019, our Board of Directors declared a dividend of $0.10 per common share, which was paid on November 16, 2018, February 15, 2019 and May 17, 2019, respectively. On June 5, 2019, our Board of Directors declared a dividend of $0.10 per common share, payable on August 16, 2019 to stockholders of record at the close of business on July 17, 2019.

Future dividends remain subject to compliance with financial covenants under our Credit Facility as well as Board approval.

(19) Legal Proceedings and Other Matters

Legacy TCS Intellectual Property Matter - Vehicle IP

In December 2009, Vehicle IP, LLC ("Vehicle IP") filed a patent infringement lawsuit in the U.S. District Court for the District of Delaware (the "District Court"), seeking monetary damages, fees and expenses and other relief from, among others, our customer Verizon Wireless ("Verizon") based on the VZ Navigator product. TCS defended Verizon against Vehicle IP. In January 2019, we received a ruling from the U.S. Court of Appeals for the Federal Circuit upholding the District Court's claim construction in our favor. Consequently, we and Vehicle IP filed a joint stipulation requesting a judgment of non-infringement, which judgment was entered on March 5, 2019. As a result of the Federal Circuit Court’s decision, this matter is now closed and during the second quarter of fiscal 2019, we reduced our accrued legal costs related to this matter and recorded a $3,204,000 benefit in the Condensed Consolidated Statement of Operations. See Note (9) - "Accrued Expenses and Other Current Liabilities" for additional information.

Legacy TCS 911 Call Handling Software Matter

During the three months ended January 31, 2019, a customer that purchased a TCS 911 call handling software solution in December 2014 (which was more than one year prior to our acquisition of TCS) (the "TCS Legacy Customer") informed us that it experienced several network outages and that it would seek indemnification for any claims made against it as a result of such outages. We are not aware of any damage claims having been asserted against us and we have not been notified by the TCS Legacy Customer of any such claims asserted against it, in connection with such outages. Nevertheless, we have submitted notification to our insurance carriers for review and consideration of coverage for potential liability that may arise from these matters.

In connection with these outages, the TCS Legacy Customer informed us that it believed certain communication failover redundancies promised to it by former senior management of TCS were never completed and has demanded that we refund to it all amounts previously paid to us under the contract, which through April 30, 2019 was approximately $14,600,000. In response to such claim, we engaged legal counsel to review the claims made by our customer. Based on such ongoing review, we believe that TCS has complied with its contractual requirements and that the customer is not entitled to any such reimbursement. Our contract to provide services to this customer expires in December 2019 and the amount of annual revenue we generate from this customer is immaterial. In an attempt to resolve the issues, the parties agreed to non-binding mediation process, which commenced in April 2019.

We also filed a lawsuit in March 2019 against a former employee and her new employer arising from such former employee's violation of her obligation to TCS of confidentiality, non-competition and non-solicitation of customers, including the TCS Legacy Customer. The former employee has responded with her own lawsuit against us.

The ultimate resolution of this matter could vary and have a material adverse effect on our consolidated results of operations, financial position or cash flows in future periods.

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

Other Matters

In October 2014, we disclosed to the U.S. Department of the Treasury, Office of Foreign Assets Control ("OFAC") that we learned during a self-assessment of our export transactions that a shipment of modems sent to a Canadian customer by Comtech EF Data Corp. was incorporated into a communication system, the ultimate end user of which was the Sudan Civil Aviation Authority. The sales value of this equipment was approximately $288,000. At the time of shipment, OFAC regulations prohibited U.S. persons from doing business directly or indirectly with Sudan. In late 2015, OFAC issued an administrative subpoena seeking information about the disclosed transaction. We responded to the subpoena, including alerting OFAC to Comtech’s repair of three modems for a customer in Lebanon who may have rerouted the modems from Lebanon to Sudan without the required U.S. licensing authorization. In September 2018, Comtech agreed to enter into a Tolling Agreement with OFAC, which extends the statute of limitations in this matter through December 31, 2019. The Tolling Agreement was shortly followed by a second administrative subpoena seeking additional information about the disclosed transaction. In December 2018, Comtech responded to a second administrative subpoena from OFAC, answering the questions it posed and providing all the documents it sought. U.S. sanctions with respect to Sudan were revoked in 2017. Consistent with the revocation of the Sudan Sanction Regulations ("SSR"), shipments to the Sudan Civil Aviation Authority by U.S. persons are now permissible. We are not able to predict whether OFAC will take any enforcement action against us in light of the revocation of the SSR. If OFAC determines that we have violated U.S. trade sanctions, civil and criminal penalties could apply, and we may suffer reputational harm. Even though we take precautions to avoid engaging in transactions that may violate U.S. trade sanctions, those measures may not be effective in every instance.

In May 2018, we were informed by the Office of Export Enforcement ("OEE") of the Department of Commerce ("DoC") that it was forwarding to the DoC's Office of Chief Counsel, the results of its audit of international shipments by Comtech Xicom Technology, Inc. for further review and possible determination of an administrative penalty. We fully cooperated with the OEE in their audit and, based on our self-assessment of the approximately 7,800 individual transactions audited, have determined that six (6) transactions may not have been fully in compliance with the Export Administration Regulations ("EAR"). These six (6) items, for which export licenses were not obtained, were either spares or repaired power amplifier subassembly components valued at less than $100,000 (in aggregate) and were shipped to Brazil, Italy, Russia, Thailand and the United Arab Emirates. The EAR provides an exception to the requirement to obtain an export license for the replacement of a defective or damaged component. During our self-assessment, we determined that we inadvertently did not obtain export licenses for the spares or evidence of the return or destruction of the defective or damaged components necessary to authorize our use of the export license exception for the replacements. Since discovering this issue, we have implemented additional controls and procedures and have increased awareness of these specific export requirements throughout the Company to help avoid similar occurrences in the future. Administrative penalties under the EAR can range from a warning letter to a denial of export privileges. A civil monetary penalty not to exceed the amount set forth in the Export Administration Act ("EAA") may be imposed for each violation, and in the event that any provision of the EAR is continued by any other authority, the maximum monetary civil penalty for each violation shall be that provided by such other authority. Administrative penalties under the EAR are currently determined pursuant to the International Emergency Economic Powers Act ("IEEPA"), which can reach the greater of twice the amount of the transaction that is the basis of the violation or approximately $300,000 per violation. We have not recorded an accrual related to a possible administrative penalty and continue to work cooperatively with the OEE.

In the ordinary course of business, we include indemnification provisions in certain of our customer contracts to indemnify, hold harmless and reimburse such customers for certain losses, including but not limited to losses related to third-party claims of intellectual property infringement arising from the customer’s use of our products or services. We may also, from time to time, receive indemnification requests from customers related to third-party claims that 911 calls were improperly routed during an emergency. We evaluate such claims as and when they arise. We do not always agree with customers that they are entitled to indemnification and in such cases reject their claims. Despite maintaining that we have properly carried out our duties, we may seek coverage under our various insurance policies; however, we cannot be sure that we will be able to maintain or obtain insurance coverage at acceptable costs or in sufficient amounts or that our insurer will not disclaim coverage as to such claims. Accordingly, pending or future claims asserted against us by a party that we agree to indemnify could result in legal costs and damages that could have a material adverse effect on our consolidated results of operations and financial condition.

There are certain other pending and threatened legal actions which arise in the normal course of business. Although the ultimate outcome of litigation is difficult to accurately predict, we believe that the outcome of these other pending and threatened actions will not have a material adverse effect on our consolidated financial condition or results of operations.

Index



ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Certain information in this Quarterly Report on Form 10-Q contains forward-looking statements, including but not limited to, information relating to our future performance and financial condition, plans and objectives of our management and our assumptions regarding such future performance, financial condition, and plans and objectives that involve certain significant known and unknown risks and uncertainties and other factors not under our control which may cause our actual results, future performance and financial condition, and achievement of our plans and objectives to be materially different from the results, performance or other expectations implied by these forward-looking statements. These factors include, among other things: the possibility that the expected synergies from recent acquisitions will not be fully realized, or will not be realized within the anticipated time periods; the risk that the acquired businesses will not be integrated with Comtech successfully; the possibility of disruption from recent acquisitions, making it more difficult to maintain business and operational relationships or retain key personnel; the risk that Comtech will be unsuccessful in implementing a tactical shift in its Government Solutions segment away from bidding on large commodity service contracts and toward pursuing contracts for its niche products with higher margins; the risks associated with Comtech's ongoing evaluation and repositioning of its enterprise technology solutions offering in its Commercial Solutions segment; the nature and timing of our receipt of, and our performance on, new or existing orders that can cause significant fluctuations in net sales and operating results; the timing and funding of government contracts; adjustments to gross profits on long-term contracts; risks associated with international sales; rapid technological change; evolving industry standards; new product announcements and enhancements, including the risks associated with Comtech's recent launch of Heights^TM Dynamic Network Access Technology ("HEIGHTS" or "HDNA"); changing customer demands and or procurement strategies; changes in prevailing economic and political conditions; changes in the price of oil in global markets; changes in foreign currency exchange rates; risks associated with Comtech's legal proceedings, customer claims for indemnification, and other similar matters; risks associated with our obligations under our Credit Facility; risks associated with our large contracts; the impact of H.R.1, also known as the Tax Cuts and Jobs Act ("Tax Reform"), which was enacted in December 2017 in the U.S.; and other factors described in this and our other filings with the Securities and Exchange Commission ("SEC").

OVERVIEW

We are a leading provider of advanced communications solutions for both commercial and government customers worldwide. Our solutions fulfill our customers’ needs for secure wireless communications in some of the most demanding environments, including those where traditional communications are unavailable or cost-prohibitive, and in mission-critical and other scenarios where performance is crucial.

We manage our business through two reportable operating segments:

•

Commercial Solutions - serves commercial customers and smaller governments, such as state and local governments, that require advanced communication technologies to meet their needs. This segment also serves certain large government customers (including the U.S. government) that have requirements for off-the-shelf commercial equipment. We believe this segment is a leading provider of satellite communications (such as satellite earth station modems and traveling wave tube amplifiers ("TWTA") and solid-state power amplifiers ("SSPAs")), public safety systems (such as next generation 911 ("NG-911") technologies) and enterprise application technologies (such as a messaging and trusted location-based technologies).

•

Government Solutions - serves large government end-users (including those of foreign countries) that require mission critical technologies and systems. We believe this segment is a leading provider of command and control applications (such as the design, installation and operation of data networks that integrate computing and communications (including both satellite and terrestrial links)), ongoing network operation and management support services including project management and fielding and maintenance solutions related to satellite ground terminals), troposcatter communications (such as digital troposcatter multiplexers, digital over-the-horizon modems, troposcatter systems, and frequency converter systems) and RF power and switching technologies (such as solid state high-power broadband amplifiers, identification friend or foe amplifiers, and amplifiers used in the counteraction of improvised explosive devices).

Index

Our Quarterly Financial Information

Quarterly and period-to-period sales and operating results may be significantly affected by either short-term or long-term contracts with our customers. In addition, our gross profit is affected by a variety of factors, including the mix of products, systems and services sold, production efficiencies, estimates of warranty expense, price competition and general economic conditions. Our gross profit may also be affected by the impact of any cumulative adjustments to contracts that are accounted for over time.

Our contracts with the U.S. government can be terminated for convenience by it at any time and orders are subject to unpredictable funding, deployment and technology decisions by the U.S. government. Some of these contracts are indefinite delivery/indefinite quantity ("IDIQ") contracts and, as such, the U.S. government is not obligated to purchase any equipment or services under these contracts. We have, in the past, experienced and we continue to expect significant fluctuations in sales and operating results from quarter-to-quarter and period-to-period. As such, comparisons between periods and our current results may not be indicative of a trend or future performance.

CRITICAL ACCOUNTING POLICIES

We consider certain accounting policies to be critical due to the estimation process involved in each.

Revenue Recognition. On August 1, 2018, we adopted ASU No. 2014-09 "Revenue from Contracts with Customers (Topic 606)" or "ASC 606" applying the modified retrospective transition method. Except for new presentation or disclosure requirements, the impact of adoption, both as of August 1, 2018 and for the three and nine months ended April 30, 2019, was not material to our business, results of operations or financial condition. As a practical expedient, we adopted the new standard only for existing contracts as of August 1, 2018. All periods prior to August 1, 2018 will continue to be reported under the accounting standards in effect in those periods.

•

Index

•

Index

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.

The timing of revenue recognition, billings and collections results in receivables, unbilled receivables and contract liabilities on our Condensed Consolidated Balance Sheet. Under typical payment terms for our contracts accounted for over time, amounts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals (e.g., monthly) or upon achievement of contractual milestones. For certain contracts with provisions that are intended to protect customers in the event we do not satisfy our performance obligations, billings occur subsequent to revenue recognition, resulting in what we have historically presented as unbilled receivables. Under ASC 606, unbilled receivables constitute contract assets. 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.

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 types of commissions are included in total estimated costs at completion for such contracts and expensed over time through cost of sales on our Condensed Consolidated Statements of Operations.

Impairment of Goodwill and Other Intangible Assets. As of April 30, 2019, total goodwill recorded on our Condensed Consolidated Balance Sheet aggregated $310.2 million (of which $251.0 million relates to our Commercial Solutions segment and $59.2 million relates to our Government Solutions segment). Additionally, as of April 30, 2019, net intangibles recorded on our Condensed Consolidated Balance Sheet aggregated $267.1 million (of which $227.9 million relates to our Commercial Solutions segment and $39.2 million relates to our Government Solutions segment). Each of our two operating segments constitutes a reporting unit and we must make various assumptions in determining their estimated fair values.

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Based on our quantitative evaluation, we determined that our Commercial Solutions and Government Solutions reporting units had estimated fair values in excess of their carrying values of at least 42.5% and 105.5%, respectively, and concluded that our goodwill was not impaired and that neither of our two reporting units was at risk of failing the quantitative assessment. It is possible that, during fiscal 2019 or beyond, business conditions (both in the U.S. and internationally) could deteriorate from the current state, our current or prospective customers could materially postpone, reduce or even forgo purchases of our products and services to a greater extent than we currently anticipate, or our common stock price could decline. A significant decline in our customers' spending that is greater than we anticipate or a shift in funding priorities may also have a negative effect on future orders, sales, income and cash flows and we might be required to perform a quantitative assessment during fiscal 2019 or beyond. If assumed net sales and cash flow projections are not achieved in future periods or our common stock price significantly declines from current levels, our Commercial Solutions and Government Solutions reporting units could be at risk of failing the quantitative assessment and goodwill and intangibles assigned to the respective reporting units could be impaired.

In any event, we are required to perform the next annual goodwill impairment analysis on August 1, 2019 (the start of our fiscal 2020). If our assumptions and related estimates change in the future, or if we change our reporting unit structure or other events and circumstances change (e.g., a sustained decrease in the price of our common stock (considered on both absolute terms and relative to peers)), we may be required to record impairment charges when we perform these tests, or in other future periods. In addition to our impairment analysis of goodwill, we also review net intangible assets with finite lives when an event occurs indicating the potential for impairment. We believe that the carrying values of our net intangible assets were recoverable as of April 30, 2019. Any impairment charges that we may record in the future could be material to our results of operations and financial condition.

Provision for Warranty Obligations. We provide warranty coverage for most of our products, including products under long-term contracts, for a period of at least one year from the date of shipment. We record a liability for estimated warranty expense based on historical claims, product failure rates and other factors. Costs associated with some of our warranties that are provided under long-term contracts are incorporated into our estimates of total contract costs. There exist inherent risks and uncertainties in estimating warranty expenses, particularly on larger or longer-term contracts. If we do not accurately estimate our warranty costs, any changes to our original estimates could be material to our results of operations and financial condition.

Accounting for Income Taxes. Our deferred tax assets and liabilities are determined based on temporary differences between financial reporting and tax bases of assets and liabilities, and applying enacted tax rates expected to be in effect for the year in which we expect the differences to reverse. Our provision for income taxes is based on domestic (including federal and state) and international statutory income tax rates in the tax jurisdictions where we operate, permanent differences between financial reporting and tax reporting and available credits and incentives. We recognize interest and penalties related to uncertain tax positions in income tax expense. The U.S. federal government is our most significant income tax jurisdiction.

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Significant judgment is required in determining income tax provisions and tax positions. We may be challenged upon review by the applicable taxing authority and positions taken by us may not be sustained. We recognize all or a portion of the benefit of income tax positions only when we have made a determination that it is more likely than not that the tax position will be sustained upon examination, based upon the technical merits of the position and other factors. For tax positions that are determined as more likely than not to be sustained upon examination, the tax benefit recognized is the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. The development of valuation allowances for deferred tax assets and reserves for income tax positions requires consideration of timing and judgments about future taxable income, tax issues and potential outcomes, and are subjective critical estimates. A portion of our deferred tax assets consist of federal net operating losses and federal research and experimentation tax credit carryforwards, most of which was acquired in connection with our acquisition of TCS. No valuation allowance has been established on these deferred tax assets based on our evaluation that our ability to realize such assets has met the criteria of "more likely than not." We continuously evaluate additional facts representing positive and negative evidence in determining our ability to realize these deferred tax assets. In certain circumstances, the ultimate outcome of exposures and risks involves significant uncertainties. If actual outcomes differ materially from these estimates, they could have a material impact on our results of operations and financial condition.

During the fiscal year ended July 31, 2018, we remeasured our deferred tax assets and liabilities. The remeasurement was recorded pursuant to ASC 740 "Income Taxes" and SEC Staff Accounting Bulletin ("SAB") 118. All amounts recorded were based on available guidance on interpretation of Tax Reform and what we believe to be reasonable approaches to estimating its impact; however, such amounts are estimates and are subject to adjustment as future guidance becomes available, additional facts become known or estimation approaches are refined. See "Notes to Condensed Consolidated Financial Statements - Note (13) - Income Taxes" for further information on the provisions of Tax Reform and its currently expected impact on our business. The overall actual impact of Tax Reform is currently uncertain, and could have a material adverse effect on our consolidated results of operations and financial condition.

Our federal income tax returns for fiscal 2017 and 2018 are subject to potential future Internal Revenue Service ("IRS") audit. None of our state income tax returns prior to fiscal 2014 are subject to audit. TCS's federal income tax returns for tax year 2015 and the tax period from January 1, 2016 to February 23, 2016, the date we acquired TCS, are subject to potential future IRS audit. None of TCS's state income tax returns prior to calendar year 2014 are subject to audit. Future tax assessments or settlements could have a material adverse effect on our consolidated results of operations and financial condition.

Research and Development Costs. We generally expense all research and development costs. Research and development expenses include payroll, employee benefits, stock-based compensation expense, and other personnel-related expenses associated with product development. Research and development expenses also include third-party development and programming costs. Costs incurred internally in researching and developing software to be sold are charged to expense until technological feasibility has been established for the software. Judgment is required in determining when technological feasibility of a product is established. Technological feasibility for our advanced communication software solutions is generally reached after all high-risk development issues have been resolved through coding and testing. Generally, this occurs shortly before the products are released to customers and when we are able to validate the marketability of such product. Once technological feasibility is established, all software costs are capitalized until the product is available for general release to customers. To date, capitalized internally developed software costs were not material.

Provisions for Excess and Obsolete Inventory. We record a provision for excess and obsolete inventory based on historical and future usage trends. Other factors may also influence our provision, including decisions to exit a product line, technological change and new product development. These factors could result in a change in the amount of excess and obsolete inventory on hand. Additionally, our estimates of future product demand may prove to be inaccurate, in which case we may have understated or overstated the provision required for excess and obsolete inventory. In the future, if we determine that our inventory was overvalued, we would be required to recognize such costs in our financial statements at the time of such determination. Any such charge could be material to our results of operations and financial condition.

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Allowance for Doubtful Accounts. We perform credit evaluations of our customers and adjust credit limits based upon customer payment history and current creditworthiness, as determined by our review of our customers’ current credit information. Generally, we will require cash in advance or payment secured by irrevocable letters of credit before an order is accepted from an international customer that we do not do business with regularly. In addition, we seek to obtain insurance for certain domestic and international customers.

We monitor collections and payments from our customers and maintain an allowance for doubtful accounts based upon our historical experience and any specific customer collection issues that we have identified. In light of ongoing tight credit market conditions, we continue to see requests from our customers for higher credit limits and longer payment terms. Because of our strong cash position and the nominal amount of interest we are earning on our cash and cash equivalents, we have, on a limited basis, approved certain customer requests.

We continue to monitor our accounts receivable credit portfolio. Our overall credit losses have historically been within our expectations of the allowances established; however, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. Measurement of credit losses requires consideration of historical loss experience, including the need to adjust for changing business conditions, and judgments about the probable effects of relevant observable data, including present economic conditions such as delinquency rates and the financial health of specific customers. Changes to the estimated allowance for doubtful accounts could be material to our results of operations and financial condition.

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Business Outlook for Fiscal 2019

Our operating results for the third quarter excelled on many fronts and we generated consolidated:


•	Net sales of $170.4 million;


•	Operating income of $11.3 million;


•	Net income of $7.6 million;


•	Cash flows from operating activities of $40.8 million; and


•	Adjusted EBITDA (a Non-GAAP financial measure discussed below) of $24.0 million.

Our third quarter results exceeded our own expectations, our business momentum remains positive and our pipeline of opportunities remains strong. We achieved a consolidated book-to-bill ratio (a measure defined as bookings divided by net sales) of 1.94 and finished the third quarter with record consolidated backlog of $747.1 million. Bookings in our third quarter reflect strength in almost all of our product lines, especially our safety and security technology solutions and our Heights^TM satellite earth station technology solutions. Both of our segments achieved book-to-bill ratios in excess of 1.00 for the most recent quarter. Our backlog is more fully defined in our most recent Annual Report on Form 10-K and the total value of multi-year contracts that we have received is substantially higher than our reported backlog.

Demand for most of our products remains strong and we are pursuing a number of large opportunities. As such, we believe that fiscal 2019 will be a year of revenue, operating income and Adjusted EBITDA growth and we are increasingly excited about our future prospects and the positive trajectory of our business.

During the third quarter, we took several steps forward on our acquisition strategy, including:

•

On February 28, 2019, we closed on our acquisition of Solacom Technologies Inc. ("Solacom"), a leading provider of Next Generation 911 ("NG-911") solutions for public safety agencies. The Solacom acquisition was a significant step in our strategy of enhancing our Commercial Solutions segment’s safety and security technology solutions. Almost immediately after we closed on the acquisition, we initiated a process to upgrade TCS legacy call-handling customers to a new Solacom solution. To-date, customer reaction has been favorable.

•

In late April 2019, we announced and immediately closed on the acquisition of the state and local government NG-911 business from General Dynamics Information Technology, Inc. (the "GD NG-911 business") and immediately hired approximately sixty GD NG-911 employees. In connection with this acquisition, we also announced that we were awarded a five-year contract valued in excess of $100.0 million to develop, implement and operate a Comtech NG-911 emergency communications system for a Northeastern State. The contract award, acquisition and hiring of talented employees are expected to strengthen Comtech’s position in the growing NG-911 solutions market.


•	We initiated efforts to acquire a small technology company whose solution offerings are complementary to our existing business. There is no certainty that this transaction or other acquisition plan efforts will be successful.

In connection with the aforementioned steps, we incurred acquisition plan expenses of $1.7 million during the third quarter of fiscal 2019. Also, we continued our evaluation and repositioning of our enterprise technology product solutions in our Commercial Solutions segment in order to improve operating efficiencies and 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 repositioning, we recorded $2.5 million of estimated contract settlement costs in our Commercial Solutions segment during the three months ended April 30, 2019. Both our acquisition plan and repositioning efforts are ongoing and our fourth quarter of fiscal 2019 is expected to be impacted by approximately $2.2 million of additional costs. Excluding the financial impact of these expenses incurred during the third quarter of fiscal 2019, our consolidated operating income would have been $15.5 million, or 9.1% of consolidated net sales.

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As of April 30, 2019, our cash and cash equivalents were $45.2 million and our total debt outstanding (including capital leases and other obligations) was $175.0 million.

Our Business Outlook for Fiscal 2019 has improved since March 6, 2019 (the date we filed our Quarterly Report on Form 10-Q with the Securities and Exchange Commission ("SEC")) and we are increasing our targeted fiscal 2019 goals for consolidated net sales and Adjusted EBITDA.

Based on our strong operating performance to-date and revenue contributions from the acquisition of the GD NG-911 business, our fiscal 2019 consolidated net sales are now expected to be higher than previously expected, with fourth quarter consolidated net sales approximating $164.6 million and total fiscal 2019 consolidated net sales approximating $660.0 million. Our updated fiscal 2019 consolidated net sales target compares favorably to our prior fiscal 2019 sales goal range of $645.0 million to $660.0 million and reflects an anticipated growth rate of 15.7% from the $570.6 million we achieved in fiscal 2018.

Our fourth quarter consolidated Adjusted EBITDA is now estimated to approximate $24.8 million with total fiscal 2019 consolidated Adjusted EBITDA approximating $90.0 million. Our updated fiscal 2019 consolidated Adjusted EBITDA target is higher than our prior range of $85.0 million to $89.0 million and reflects an anticipated growth rate of 14.8% from the $78.4 million we achieved in fiscal 2018.

Total amortization of intangible assets is expected to approximate $18.3 million in fiscal 2019 with the fourth quarter approximating $5.2 million.

Total amortization of stock-based compensation expense in the fourth quarter is expected to approximate $8.6 million. On an annual basis, amortization of stock-based compensation expense in fiscal 2019 is expected to approximate $12.0 million as compared to $8.6 million amortized in fiscal 2018. The ultimate amount of amortization of stock-based compensation expense will be based on the finalization of our fiscal 2019 incentive plan, which we anticipate will be paid largely in the form of fully-vested but restricted share units, as we did in fiscal 2018 and 2017. We believe settlement of annual incentive plan awards in the form of restricted share units aligns the interest of employees with that of shareholders by restricting the sale of shares for a one-year period while at the same time providing employees an immediate benefit that is not subject to vesting.

After considering the impact of all actual and expected GAAP operating expenses, consolidated GAAP operating income in fiscal 2019, both in dollars and as a percentage of consolidated net sales, is expected to be slightly lower than the related amounts achieved in fiscal 2018.

Excluding the net impact of $9.2 million of year-to-date expenses relating to: (i) $4.6 million of acquisition plan expenses; (ii) $6.4 million of estimated contract settlement costs; (iii) $3.2 million of settlement of intellectual property litigation; and (iv) $1.4 million of facility exit costs (all of which are discussed further below) and the anticipated impact of an additional $2.2 million of acquisition plan expenses and estimated contract settlement costs expected during the fourth quarter of fiscal 2019, consolidated operating income in fiscal 2019, both in dollars and as a percentage of consolidated net sales, is expected to be significantly higher than the GAAP dollar amount and percentage of consolidated net sales of $35.1 million and 6.2%, respectively, achieved in fiscal 2018.

Our effective tax rate for fiscal 2019 (excluding net discrete items) is expected to approximate 23.0%.

We expect our fourth quarter of fiscal 2019 to be impacted by a charge of approximately $2.2 million or $0.07 GAAP EPS primarily related to ongoing efforts for a small targeted acquisition and our enterprise technology product solutions repositioning. Our updated GAAP earnings per diluted share ("EPS") target for fiscal 2019 is now $0.88 with our fourth quarter GAAP EPS approximating $0.10. Our GAAP EPS for fiscal 2019 will depend on the actual finalization of stock-based compensation as well the settlement of certain stock-based awards during the fourth quarter of fiscal 2019.

Our updated fiscal 2019 financial targets include a number of items, the timing of which can still shift and impact our quarterly financial performance. However, we currently do not believe that changes in such timing would negatively impact our ability to achieve our revised consolidated net sales, GAAP operating income and Adjusted EBITDA targets for fiscal 2019. If order flow remains strong and we can achieve all of our fiscal 2019 business goals, it is possible that consolidated net sales and consolidated Adjusted EBITDA could be higher than our targeted amounts.

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Our updated fiscal 2019 financial targets depend, in large part, on timely deliveries and the receipt of, and performance on, orders from our customers and could be adversely impacted if orders and/or deliveries are delayed, business conditions deteriorate, or our current or prospective customers materially postpone, reduce or even forgo purchases of our products and services. Additionally, we continue to evaluate cost reduction initiatives in our business, including in connection with the repositioning of our enterprise technology product solution offerings. Our updated fiscal 2019 financial targets do not consider the financial impact of any additional future actions we may take in this regard.

On June 5, 2019, our Board of Directors declared a dividend of $0.10 per common share, payable on August 16, 2019 to stockholders of record at the close of business on July 17, 2019. Future dividends remain subject to compliance with financial covenants under our Credit Facility as well as Board approval.

Additional information related to our Business Outlook for Fiscal 2019 and a definition and explanation of Adjusted EBITDA is included in the below sections entitled "Comparison of the Results of Operations for the Three Months Ended April 30, 2019 and 2018" and "Comparison of the Results of Operations for the Nine Months Ended April 30, 2019 and 2018."

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COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED APRIL 30, 2019 AND 2018

Net Sales. Consolidated net sales were $170.4 million and $147.9 million for the three months ended April 30, 2019 and 2018, respectively, representing an increase of $22.5 million, or 15.2%. The period-over-period increase in net sales is primarily due to significantly higher net sales in our Government Solutions segment. Net sales by operating segment are discussed below.

Commercial Solutions

Net sales in our Commercial Solutions segment were $89.6 million for the three months ended April 30, 2019, as compared to $89.9 million for the three months ended April 30, 2018, a slight decrease of $0.3 million. Our Commercial Solutions segment represented 52.6% of consolidated net sales for the three months ended April 30, 2019 as compared to 60.8% for the three months ended April 30, 2018.

Our third quarter of fiscal 2019 was an exceptional quarter of bookings. Our book-to-bill ratio (a measure defined as bookings divided by net sales) during the three months ended April 30, 2019 for this segment was 2.57. In connection with our GD NG-911 acquisition, we received a five-year contract valued in excess of $100.0 million to develop, implement and operate a Comtech Next Generation 911 ("NG-911") emergency communications system for a Northeastern State.

As further discussed below, business momentum is strong and we have a solid pipeline of opportunities.

Net sales of our satellite earth station products (which include satellite modems, traveling wave tube amplifiers ("TWTAs") and solid-state power amplifiers ("SSPAs")) during the three months ended April 30, 2019 were lower than the three months ended April 30, 2018. Sales to our international customers this quarter were the highest all year but were offset by lower sales of our SLM-5650B satellite modems, upgrade kits and related services pursuant to a previously awarded $59.0 million contract from the U.S. Navy’s Space and Naval Warfare Systems Command. During the third quarter of fiscal 2018, we shipped large amounts of such solutions.

Our Heights^TM solutions continued to gain traction in our third fiscal quarter. We continue to seed and invest in the market and have received significant orders, including orders from SES Networks to support its global mobility services and from Claro Argentina to connect rural communities throughout Argentina with high-speed 2G/3G and LTE mobile backhaul. We also announced our expansion of the Heights^TM product line with a new low-cost, high-performance “H-Pico” remote gateway. Year-to-date bookings for this product line have now exceeded the amount we achieved in fiscal 2018 and we believe we will receive additional Heights^TM bookings during our fourth quarter of fiscal 2019. In view of these developments, we believe that fiscal 2019 will be our second consecutive year of net sales growth for our satellite earth station product line.

Net sales for the three months ended April 30, 2019 of our safety and security technology solutions (such as our wireless and NG-911 platforms) were higher as compared to the net sales we achieved in the three months ended April 30, 2018. Sales in this period benefited from organic growth and contributions from Solacom Technologies Inc. ("Solacom"), which we acquired on February 28, 2019. Net sales for the three months ended April 30, 2019 included only two days of net sales contribution from the GD NG-911 business acquisition, which closed on April 29, 2019. To-date, customer reaction to both our Solacom and GD NG-911 acquisitions have been extremely positive. We believe that overall market conditions for these products remain favorable and, based on our year-to-date performance, we expect fiscal 2019 to be a year of net sales growth for our safety and security technology solutions as compared to fiscal 2018.

Net sales for the three months ended April 30, 2019 of enterprise technology solutions (such as our location and messaging platforms) were lower than the net sales we achieved in the three months ended April 30, 2018. During the third quarter of fiscal 2019, we continued our efforts to reposition this product line to focus on providing higher margin solution offerings to our customers. To-date, we have ceased offering certain solutions, have worked with customers to wind-down certain legacy contracts and have not renewed certain contracts. As a result of our decisions, net sales for our enterprise technology solutions are expected to be lower in fiscal 2019 than in fiscal 2018.

In the aggregate, we expect fiscal 2019 net sales in our Commercial Solutions segment to increase as compared to fiscal 2018.

Bookings, sales and profitability in our Commercial Solutions segment can fluctuate from period-to-period due to many factors, including changes in the general business environment. As such, period-to-period comparisons of our results may not be indicative of a trend or future performance.

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Government Solutions

Net sales in our Government Solutions segment were $80.8 million for the three months ended April 30, 2019 as compared to $57.9 million for the three months ended April 30, 2018, a significant increase of $22.9 million, or 39.6%. Our Government Solutions segment represented 47.4% of consolidated net sales for the three months ended April 30, 2019, as compared to 39.2% for the three months ended April 30, 2018.

Bookings in our Government Solutions segment for the three months ended April 30, 2019 were strong and our book-to-bill ratio (a measure defined as bookings divided by net sales) for this segment was 1.24. Variations in quarterly bookings is normal for this segment and as further discussed below, business momentum is strong and we have a sold pipeline of opportunities.

Net sales of our command and control solutions (which include command and control applications, ongoing network operation and management support services) during the three months ended April 30, 2019 were significantly higher as compared to the three months ended April 30, 2018. During the third quarter, we received important orders including: (i) $42.6 million of orders to supply Manpack Satellite Terminals, networking equipment and other advanced VSAT products to the U.S. Army (which were booked pursuant to our $223.4 million Global Tactical Advanced Communication Systems ("GTACS") contract with the U.S. Army's PM Tactical Network, which has a remaining unfunded contract value of $47.3 million as of April 30, 2019); (ii) $19.8 million of orders to provide ongoing sustainment services to the U.S. Army for the AN/TSC-198A SNAP (Secret Internet Protocol Router ("SIPR") and Non-classified Internet Protocol Router ("NIPR") Access Point), Very Small Aperture Terminals ("VSATs"); and (iii) a $3.5 million follow-on satellite service order from a major national security solutions provider.

Net sales of Blue Force Tracking-1 ("BFT-1") sustainment services during the three months ended April 30, 2019 were slightly higher as compared to the three months ended April 30, 2018. We continued to work with the U.S. Army with respect to our MT-2025 satellite transceivers. These transceivers meet BFT-2 protocols, provide best-in-class reliability and are fully backward compatible with the BFT-1 system. Because the amount and timing of any future MT-2025 satellite transceiver orders are difficult to predict, we have not included any net sales contributions in our updated Business Outlook for Fiscal 2019.

Net sales of our over-the-horizon microwave systems products for the three months ended April 30, 2019 were higher than the three months ended April 30, 2018. During the third quarter of fiscal 2019, our teaming partner on a large proposal informed us that a contract award to provide troposcatter equipment to the U.S. Army was awarded to another large prime contractor and that our partner's protest was denied. Although we are disappointed in this decision, we continue to work with our partner and are now focusing our efforts on a separate procurement proposal for the U.S. Marine Corps. We have not included any net sales contributions in our updated Business Outlook for Fiscal 2019 related to this potential award.

A large portion of contract awards we booked during the third quarter of fiscal 2019 are not expected to ship or be performed until fiscal 2020. As such, based on our current assessment, we expect net sales in our Government Solutions segment in the fourth quarter of fiscal 2019 to be lower than the amount we achieved in the third quarter. However, based on fiscal 2019 performance to-date, the mix and anticipated timing of performance on orders in backlog and expected new orders, we anticipate that fiscal 2019 net sales for our Government Solutions segment will be significantly higher than fiscal 2018.

Bookings, sales and profitability in our Government Solutions segment can fluctuate dramatically from period-to-period due to many factors, including unpredictable funding, deployment and technology decisions by our U.S. and international government customers. As such, period-to-period comparisons of our results may not be indicative of a trend or future performance.

Geography and Customer Type

Net sales by geography and customer type, as a percentage of segment and consolidated net sales, for the three months ended April 30, 2019 and 2018 are as follows:



	Three months ended April 30,
	2019		2018		2019		2018		2019		2018
	Commercial Solutions				Government Solutions				Consolidated
U.S. government	19.2	%	22.2	%	60.8	%	61.0	%	38.9	%	37.4	%
Domestic	53.8	%	53.3	%	13.5	%	14.4	%	34.7	%	38.0	%
Total U.S.	73.0	%	75.5	%	74.3	%	75.4	%	73.6	%	75.4	%

International	27.0	%	24.5	%	25.7	%	24.6	%	26.4	%	24.6	%
Total	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%

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Net 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 net sales include sales to commercial customers, as well as to U.S. state and local governments. Included in domestic net sales, are sales to Verizon Communications Inc. ("Verizon"). Sales to Verizon were 9.2% and 9.8%, respectively, of consolidated net sales for the three months ended April 30, 2019 and 2018.

International net sales for the three months ended April 30, 2019 and 2018 (which include sales to U.S. domestic companies for inclusion in products that are sold to international customers) were $45.0 million and $36.3 million, respectively. Except for the U.S., no individual country (including sales to U.S. domestic companies for inclusion in products that are sold to a foreign country) represented more than 10.0% of consolidated net sales for the three months ended April 30, 2019 and 2018.

Gross Profit. Gross profit was $64.4 million and $62.4 million for the three months ended April 30, 2019 and 2018, respectively. The increase of $2.0 million reflects significantly higher net sales in our Government Solutions segment, as discussed above.

Gross profit, as a percentage of consolidated net sales, for the three months ended April 30, 2019 was 37.8% as compared to 42.2% for the three months ended April 30, 2018. The decrease in gross profit, as a percentage of consolidated net sales, was largely driven by the significant period-to-period increase in net sales in our Government Solutions segment, as discussed above. This segment historically achieves lower gross margins than our Commercial Solutions segment. Gross profit, as a percentage of related segment net sales, is further discussed below.

Our Commercial Solutions segment's gross profit, as a percentage of related segment net sales, for the three months ended April 30, 2019 was lower than the three months ended April 30, 2018 due to a more favorable product mix in the prior year comparable period (including deliveries of our satellite earth station equipment to the U.S. Navy, as discussed above). Our Business Outlook for Fiscal 2019 assumes we continue to seed and invest in the market for our Heights^TM solutions and that related sales will grow significantly from the level we achieved in fiscal 2018. Today, Heights^TM solutions have lower gross margins than our traditional Single Channel per Carrier ("SCPC") satellite earth station modems and, given expected sales growth, our gross profit, as a percentage of satellite earth station product sales in fiscal 2019, is expected to be lower as compared to fiscal 2018. Over time, we believe that margins will improve as Heights^TM volume increases. Overall, looking forward, based on the mix and anticipated timing of shipments and performance related to orders currently in our backlog and the mix and timing of expected new orders, gross profit for this segment, as a percentage of related segment net sales, for fiscal 2019 is expected to be lower than the level achieved in fiscal 2018.

Our Government Solutions segment's gross profit, as a percentage of related segment net sales, for the three months ended April 30, 2019 was lower than the level we achieved in the three months ended April 30, 2018. This decrease was primarily due to product mix changes during the most recent fiscal quarter, particularly within our over-the-horizon microwave systems product line. Based on the mix and anticipated timing of shipments and performance related to orders currently in our backlog and the mix and timing of expected new orders, gross profit for this segment, as a percentage of related segment net sales, for fiscal 2019 is expected to be comparable to the level achieved in fiscal 2018.

Included in consolidated cost of sales for the three months ended April 30, 2019 and 2018 are provisions for excess and obsolete inventory of $0.7 million and $1.2 million, respectively. As discussed in "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies - Provisions for Excess and Obsolete Inventory," we regularly review our inventory and record a provision for excess and obsolete inventory based on historical and projected usage assumptions.

Because our consolidated gross profit, as a percentage of consolidated net sales, depends on the volume of sales, sales mix and related gross profit for each individual segment, it is inherently difficult to forecast. Nevertheless, based on expected bookings, expected timing of our performance on orders and the anticipated increase of Government Solutions segment net sales as a percentage of consolidated net sales, we currently expect our consolidated gross profit, as a percentage of consolidated net sales, for fiscal 2019 to be lower than the percentage we achieved in fiscal 2018.

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $33.4 million and $30.4 million for the three months ended April 30, 2019 and 2018, respectively, representing an increase of $3.0 million, or 9.9%. As a percentage of consolidated net sales, selling, general and administrative expenses were 19.6% and 20.6% for the three months ended April 30, 2019 and 2018, respectively. The decrease, as a percentage of consolidated net sales, is primarily attributable to the increase in our consolidated net sales.

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Excluding a $2.5 million expense for estimated contract settlement costs related to an ongoing repositioning of our enterprise technology solutions offerings in our Commercial Solutions segment, our selling, general and administrative expenses for the three months ended April 30, 2019 would have been $30.9 million, or 18.1% of consolidated net sales.

Amortization of stock-based compensation expense recorded as selling, general and administrative expenses was $1.0 million in both the three months ended April 30, 2019 and 2018. Amortization of stock-based compensation is not allocated to our two reportable operating segments.

Based on our current spending plans, we expect fiscal 2019 selling, general and administrative expenses, in dollars, to be higher and, as a percentage of consolidated net sales, to be similar to the percentage achieved in fiscal 2018.

Research and Development Expenses. Research and development expenses were $13.5 million and $12.8 million for the three months ended April 30, 2019 and 2018, respectively, representing an increase of $0.7 million, or 5.5%. As a percentage of consolidated net sales, research and development expenses were 7.9% and 8.7% for the three months ended April 30, 2019 and 2018, respectively.

For the three months ended April 30, 2019 and 2018, research and development expenses of $11.6 million and $11.3 million, respectively, related to our Commercial Solutions segment, and $1.8 million and $1.4 million, respectively, related to our Government Solutions segment. The remaining research and development expenses of $0.1 million for both the three months ended April 30, 2019 and 2018, related to the amortization of stock-based compensation expense.

Whenever possible, we seek customer funding for research and development to adapt our products to specialized customer requirements. During the three months ended April 30, 2019 and 2018, customers reimbursed us $3.3 million and $5.0 million, respectively, which is not reflected in the reported research and development expenses but is included in net sales with the related costs included in cost of sales.

We continue to invest in enhancements to existing products as well as in new products across almost all of our product lines. Based on our current spending plans, we expect fiscal 2019 research and development expenses, in dollars, to be higher and, as a percentage of consolidated net sales, to be lower than fiscal 2018.

Amortization of Intangibles. Amortization relating to intangible assets with finite lives was $4.5 million (of which $3.7 million was for the Commercial Solutions segment and $0.8 million was for the Government Solutions segment) for the three months ended April 30, 2019 and $5.3 million (of which $4.4 million was for the Commercial Solutions segment and $0.8 million was for the Government Solutions segment) for the three months ended April 30, 2018. The decrease from $5.3 million to $4.5 million was the result of certain intangible assets in our Commercial Solutions segment that became fully amortized in fiscal 2018, offset in part by an increase in amortization relating to our acquisition of Solacom in February 2019.

As a result of our acquisition of the GD NG-911 business in late April 2019, amortization of intangible assets during our fourth quarter of fiscal 2019 is estimated to increase to $5.2 million as compared to the $4.5 million recorded in our third quarter of fiscal 2019. Our Business Outlook for Fiscal 2019 now assumes total annual amortization of intangible assets of approximately $18.3 million.

Acquisition Plan Expenses. During the third quarter of fiscal 2019, we incurred $1.7 million of total acquisition plan expenses. These expenses are recorded in our Unallocated segment and primarily related to our acquisitions of Solacom and the GD NG-911 business, as discussed above. During the third quarter of fiscal 2019, we initiated efforts to acquire a small technology company whose solution offerings are complementary to our existing business. There is no certainty that our acquisition plan efforts will be successful.

Operating Income. Operating income for the three months ended April 30, 2019 was $11.3 million as compared to $14.0 million for the three months ended April 30, 2018. Operating income (loss) by reportable segment is shown in the table below:



	Three months ended April 30,
	2019			2018		2019		2018		2019		2018		2019			2018
($ in millions)	Commercial Solutions					Government Solutions				Unallocated				Consolidated
Operating income (loss)	$	8.1		13.3		10.1		6.0		(6.9	)	(5.4	)	$	11.3		14.0
Percentage of related net sales	9.0		%	14.8	%	12.5	%	10.4	%	NA		NA		6.6		%	9.5	%

Index

The significant decrease in our Commercial Solutions segment’s operating income, both in dollars and as a percentage of related segment net sales, reflects $2.5 million of estimated contract settlement costs, as discussed above. Excluding such charge, operating income in our Commercial Solutions segment for the three months ended April 30, 2019 would have been $10.6 million, or 11.8% of related segment net sales. The decrease from the three months ended April 30, 2018, both in dollars and as a percentage of related segment net sales, is due primarily to a lower gross profit percentage and slightly higher research and development expenses, offset in part by lower amortization of intangibles, as discussed above. Looking forward, excluding total estimated contract settlement costs, we expect fiscal 2019 operating income, both in dollars and as a percentage of related segment net sales, to be similar to fiscal 2018.

The significant increase in our Government Solutions segment’s operating income, both in dollars and as a percentage of related segment net sales, was primarily due to significantly higher net sales, offset in part by higher research and development expenses, as discussed above. Looking forward, we expect fiscal 2019 operating income, in dollars and as a percentage of related segment net sales, to be significantly higher as compared to fiscal 2018.

The increase in unallocated expenses is primarily due to increased business and sales activity during the third quarter and the incurrence of acquisition plan expenses, as discussed above. Amortization of stock-based compensation was $1.1 million for both the three months ended April 30, 2019 and 2018. Amortization of stock-based compensation can fluctuate from period-to-period based on the type and timing of stock-based awards, estimated forfeitures and the achievement of applicable performance goals.

Total amortization of stock-based compensation expense in the fourth quarter is expected to approximate $8.6 million. On an annual basis, amortization of stock-based compensation expense in fiscal 2019 is expected to approximate $12.0 million as compared to the $8.6 million amortized in fiscal 2018. This increase is largely due to an increase in the number and value of annual non-equity incentive awards expected to be granted in fiscal 2019. Our Business Outlook for Fiscal 2019 assumes that we will continue to pay certain annual non-equity incentive awards in the form of fully vested share units, as we did in fiscal 2018 and 2017.

Looking forward, unallocated operating expenses are expected to be higher in fiscal 2019 as compared to fiscal 2018. This expected increase is primarily due to anticipated changes in compensation costs (including amortization of stock-based compensation expense), acquisition plan expenses and other increased spending, offset in part by the benefit from the favorable ruling related to a legacy TCS intellectual property matter during the second quarter.

Consolidated GAAP operating income was $11.3 million or 6.6% of consolidated net sales in our most recent quarter as compared to GAAP operating income of $14.0 million or 9.5% of consolidated net sales in the third quarter of fiscal 2018. Excluding the $1.7 million of acquisition plan expenses and $2.5 million expense for estimated contract settlement costs, as discussed above, consolidated operating income would have been $15.5 million, or 9.1% of consolidated net sales in the third quarter of fiscal 2019.

Looking forward, after considering the impact of all actual and expected GAAP operating expenses, consolidated GAAP operating income in fiscal 2019, in dollars, is expected to be similar to the $35.1 million and, as a percentage of consolidated net sales, to be lower than the 6.2% that we achieved in fiscal 2018. Such GAAP operating income target includes the additional acquisition plan expenses and estimated contract settlement costs of approximately $2.2 million expected during the fourth quarter of fiscal 2019.

Interest Expense. Interest expense was $2.2 million and $2.5 million for the three months ended April 30, 2019 and 2018, respectively. Our effective interest rate (including amortization of deferred financing costs) in the three months ended April 30, 2019 was approximately 5.0%. Our current cash borrowing rate (which excludes the amortization of deferred financing costs) approximates 4.2%.

Based on the type, terms, amount of outstanding debt (including capital leases and other obligations) and current interest rates, our effective interest rate (including amortization of deferred financing costs) in fiscal 2019 will approximate 5.2% in fiscal 2019. Overall, total interest expense in fiscal 2019 is expected to approximate $9.4 million.

Interest (Income) and Other. Interest (income) and other for both the three months ended April 30, 2019 and 2018 was nominal. All of our available cash and cash equivalents are currently invested in bank deposits and money market deposit accounts which, at this time, are currently yielding an immaterial interest rate.

Provision For Income Taxes. The provision for income taxes during the three months ended April 30, 2019 was $1.5 million as compared to $3.1 million for the three months ended April 30, 2018.

Index

During the third quarter of fiscal 2019, we recorded a net discrete tax benefit of $0.6 million primarily related to the reversal of tax contingencies no longer required due to the expiration of applicable statutes of limitation and the finalization of certain tax deductions in connection with the filing of our fiscal 2018 federal income tax return. Excluding discrete tax items, our effective tax rate was 23.0%. Our Business Outlook for Fiscal 2019 excludes the impact of any additional discrete tax items that could occur in the fourth quarter.

During the third quarter of fiscal 2018, we recorded a net discrete tax expense of less than $0.1 million. Excluding discrete tax items for the three months ended April 30, 2018, our effective tax rate was 27.0%.

The decrease from 27.0% to 23.0% is principally attributable to the passage of Tax Reform which reduced the statutory income tax rate from 35.0% to 21.0%. Such decrease was partially offset by non-deductible transaction costs related to the acquisition of Solacom and lower tax deductions for certain executive compensation expenses.

Our federal income tax returns for fiscal 2017 and 2018 are subject to potential future IRS audit. None of our state income tax returns prior to fiscal 2014 are subject to audit. TCS's federal income tax returns for tax year 2015 and the tax period from January 1, 2016 to February 23, 2016, the date we acquired TCS, are subject to potential future IRS audit. None of TCS's state income tax returns prior to calendar year 2014 are subject to audit. Future tax assessments or settlements could have a material adverse effect on our consolidated results of operations and financial condition.

Net Income. During the three months ended April 30, 2019 and 2018, consolidated net income was $7.6 million and $8.2 million, respectively.

Adjusted EBITDA. Adjusted EBITDA (both in dollars and as a percentage of related net sales) for both the three months ended April 30, 2019 and 2018 are shown in the table below (numbers in the table may not foot due to rounding):



	Three months ended April 30,
	2019			2018		2019		2018		2019		2018		2019			2018
($ in millions)	Commercial Solutions					Government Solutions				Unallocated				Consolidated
Net income (loss)	$	8.1		12.9		10.1		6.0		(10.5	)	(10.7	)	$	7.6		8.2
Provision for income taxes	—			0.2		—		—		1.5		2.9		1.5			3.1
Interest (income) and other	—			0.1		—		0.1		—		—		—			0.2
Interest expense	—			—		—		—		2.1		2.5		2.2			2.5
Amortization of stock-based compensation	—			—		—		—		1.1		1.1		1.1			1.1
Amortization of intangibles	3.7			4.4		0.8		0.8		—		—		4.5			5.3
Depreciation	2.4			2.3		0.4		0.6		0.2		0.3		2.9			3.2
Estimated contract settlement costs	2.5			—		—		—		—		—		2.5			—
Acquisition plan expenses	—			—		—		—		1.7		—		1.7			—
Adjusted EBITDA	$	16.7		20.0		11.3		7.5		(3.9	)	(4.0	)	$	24.0		23.5
Percentage of related net sales	18.6		%	22.3	%	13.9	%	12.9	%	NA		NA		14.1		%	15.9	%

The increase in consolidated Adjusted EBITDA, in dollars, during the three months ended April 30, 2019 as compared to the three months ended April 30, 2018 reflects significantly higher net sales in our Government Solutions segment, as discussed above. The decrease in consolidated Adjusted EBITDA, as a percentage of consolidated net sales, during the three months ended April 30, 2019 as compared to the three months ended April 30, 2018 reflects product mix changes in both of our segments, as discussed above.

The decrease in our Commercial Solutions segment's Adjusted EBITDA, both in dollars and as a percentage of related segment net sales, was primarily attributable to lower gross margins and higher research and development expenses, as discussed above.

The significant increase in our Government Solutions segment's Adjusted EBITDA, both in dollars and as a percentage of related segment net sales, was primarily driven by significantly higher net sales, offset in part by higher research and development expenses, as discussed above.

Index

Because our consolidated Adjusted EBITDA, as a percentage of consolidated net sales, depends on the volume of sales, sales mix and related gross profit for each individual segment as well as unallocated spending, it is inherently difficult to forecast. In addition, our Business Outlook for Fiscal 2019 includes a number of items, the timing of which can still shift and impact our expected quarterly financial performance. Nevertheless, based on expected bookings, expected timing of our performance on orders and the anticipated increase in our Government Solutions segment net sales as a percentage of consolidated net sales, we currently expect our consolidated Adjusted EBITDA, as a percentage of consolidated net sales, for fiscal 2019 to be similar to the percentage we achieved in fiscal 2018.

A reconciliation of our fiscal 2018 GAAP Net Income to Adjusted EBITDA of $78.4 million is shown in the table below (numbers in the table may not foot due to rounding):



($ in millions)	Fiscal Year 2018
Reconciliation of GAAP Net Income to Adjusted EBITDA:
Net income	$	29.8
Income taxes	(5.1		)
Interest (income) and other	0.3
Interest expense	10.2
Amortization of stock-based compensation	8.6
Amortization of intangibles	21.1
Depreciation	13.7
Adjusted EBITDA	$	78.4

In addition, a reconciliation of our GAAP consolidated operating income, net income and net income per diluted share during the three months ended April 30, 2019 and 2018 to the corresponding Non-GAAP measures is shown in the tables below (numbers and per share amounts in the table may not foot due to rounding):



	Three months ended April 30, 2019
($ in millions, except for per share amount)	Operating Income		Net Income			Net Income per Diluted Share
Reconciliation of GAAP to Non-GAAP Earnings:
GAAP measures, as reported	$	11.3	$	7.6		$	0.31
Estimated contract settlement costs	2.5		1.9			0.08
Acquisition plan expenses	1.7		1.3			0.05
Net discrete tax benefit	—		(0.6		)	(0.02		)
Non-GAAP measures	$	15.5	$	10.2		$	0.42

	Three months ended April 30, 2018
($ in millions, except for per share amount)	Operating Income		Net Income			Net Income per Diluted Share
Reconciliation of GAAP to Non-GAAP Earnings:
GAAP measures, as reported	$	14.0	$	8.2		$	0.34
Non-GAAP measures	$	14.0	$	8.2		$	0.34

Index

Our Adjusted EBITDA is a Non-GAAP measure that represents earnings (loss) before income taxes, interest (income) and other, write-off of deferred financing costs, interest expense, amortization of stock-based compensation, amortization of intangible assets, depreciation expense, estimated contract settlement costs, settlement of intellectual property litigation, acquisition plan expenses or strategic alternatives analysis expenses, facility exit costs and other. Our definition of Adjusted EBITDA may differ from the definition of EBITDA used by other companies and therefore may not be comparable to similarly titled measures used by other companies. Adjusted EBITDA is also a measure frequently requested by our investors and analysts. We believe that investors and analysts may use Adjusted EBITDA, along with other information contained in our SEC filings, in assessing our performance and comparability of our results with other companies. Our Non-GAAP measures for consolidated operating income, net income and net income per diluted share reflect the GAAP measures as reported, adjusted for certain items as described. These Non-GAAP financial measures have limitations as an analytical tool as they exclude the financial impact of transactions necessary to conduct our business, such as the granting of equity compensation awards, and are not intended to be an alternative to financial measures prepared in accordance with GAAP. These measures are adjusted as described in the reconciliation of GAAP to Non-GAAP in the above tables, but these adjustments should not be construed as an inference that all of these adjustments or costs are unusual, infrequent or non-recurring. Non-GAAP financial measures should be considered in addition to, and not as a substitute for or superior to, financial measures determined in accordance with GAAP. Investors are advised to carefully review the GAAP financial results that are disclosed in our SEC filings. We have not quantitatively reconciled our fiscal 2019 Adjusted EBITDA target to the most directly comparable GAAP measure because items such as stock-based compensation, adjustments to the provision for income taxes, amortization of intangible assets and interest expense, which are specific items that impact these measures, have not yet occurred, are out of our control, or cannot be predicted. For example, quantification of stock-based compensation expense requires inputs such as the number of shares granted and market price that are not currently ascertainable. Accordingly, reconciliations to the Non-GAAP forward looking metrics are not available without unreasonable effort and such unavailable reconciling items could significantly impact our financial results.

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COMPARISON OF THE RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED APRIL 30, 2019 AND 2018

Net Sales. Consolidated net sales were $495.4 million and $403.2 million for the nine months ended April 30, 2019 and 2018, respectively, representing a significant increase of $92.2 million, or 22.9%. The significant period-over-period increase in net sales reflects significantly higher net sales in our Government Solutions segment and to a lesser extent, our Commercial Solutions segment. Net sales by operating segment are discussed below.

Commercial Solutions

Net sales in our Commercial Solutions segment were $254.3 million for the nine months ended April 30, 2019, as compared to $251.9 million for the nine months ended April 30, 2018, an increase of $2.4 million, or 1.0%. Our Commercial Solutions segment represented 51.3% of consolidated net sales for the nine months ended April 30, 2019 as compared to 62.5% for the nine months ended April 30, 2018.

Bookings in our Commercial Solutions segment for the nine months ended April 30, 2019 were strong and our book-to-bill ratio (a measure defined as bookings divided by net sales) for this segment was 1.50. In connection with our GD NG-911 acquisition, we received a five-year contract valued in excess of $100.0 million to develop, implement and operate a Comtech Next Generation 911 (“NG-911”) emergency communications system for a Northeastern State.

As further discussed below, business momentum is strong and we have a solid pipeline of opportunities in this segment.

Net sales of our satellite earth station products (which include satellite modems, traveling wave tube amplifiers ("TWTAs") and solid-state power amplifiers ("SSPAs")) during the nine months ended April 30, 2019 were slightly lower than the nine months ended April 30, 2018. Net sales during the most recent year-to-date period include sales of our SLM-5650B satellite modems, upgrade kits and related services pursuant to a previously awarded $59.0 million contract from the U.S. Navy's Space and Naval Warfare Systems Command.

Net sales for the nine months ended April 30, 2019 of our safety and security technology solutions (such as our wireless and NG-911 platforms) were higher as compared to the net sales we achieved in the nine months ended April 30, 2018. Sales in the most recent year-to-date period benefited from organic growth and contributions from Solacom Technologies Inc. ("Solacom"), which we acquired on February 28, 2019. Net sales for the most recent year-to-date period included only two days of net sales contribution from the GD NG-911 acquisition, which closed on April 29, 2019. To-date, customer reaction to both our Solacom and GD NG-911 acquisitions have been extremely positive. We believe that overall market conditions for these products remain favorable and, based on our year-to-date performance, we expect fiscal 2019 to be a year of net sales growth for our safety and security technology solutions as compared to fiscal 2018.

Net sales for the nine months ended April 30, 2019 of enterprise technology solutions (such as our location and messaging platforms) were lower than the net sales we achieved in the nine months ended April 30, 2018. During the third quarter, we continued our efforts to reposition this product line to focus on providing higher margin solution offerings to our customers. To-date, we have ceased offering certain solutions, have worked with customers to wind-down certain legacy contracts and have not renewed certain contracts. As a result of our decisions, net sales for our enterprise technology solutions are expected to be lower in fiscal 2019 than in fiscal 2018.

In the aggregate, we expect fiscal 2019 net sales in our Commercial Solutions segment to increase as compared to fiscal 2018.

Index

Government Solutions

Net sales in our Government Solutions segment were $241.1 million for the nine months ended April 30, 2019 as compared to $151.3 million for the nine months ended April 30, 2018, a significant increase of $89.8 million, or 59.4%. Our Government Solutions segment represented 48.7% of consolidated net sales for the nine months ended April 30, 2019, as compared to 37.5% for the nine months ended April 30, 2018.

Bookings in our Government Solutions segment for the nine months ended April 30, 2019 were strong and our book-to-bill ratio (a measure defined as bookings divided by net sales) for this segment was 0.95. Variations in quarterly bookings is normal for this segment and as further discussed below, business momentum is strong and we have a solid pipeline of opportunities.

Net sales of our command and control solutions (which include command and control applications, ongoing network operation and management support services) during the nine months ended April 30, 2019 were significantly higher as compared to the nine months ended April 30, 2018. During the most recent year-to-date period, we received important orders including: (i) over $76.2 million of orders to supply Manpack Satellite Terminals, networking equipment and other advanced VSAT products to the U.S. Army (which were booked pursuant to our $223.4 million Global Tactical Advanced Communication Systems ("GTACS") contract with the U.S. Army's PM Tactical Network, which has a remaining unfunded contract value of $47.3 million as of April 30, 2019); (ii) $32.1 million of orders to provide ongoing sustainment services to the U.S. Army for the AN/TSC-198A SNAP (Secret Internet Protocol Router ("SIPR") and Non-classified Internet Protocol Router ("NIPR") Access Point), Very Small Aperture Terminals ("VSATs"); (iii) $11.9 million of orders for cyber security training solutions; (iv) a $3.5 million follow-on satellite service order from a major national security solutions provider; and (v) $3.0 million of orders for antenna feeds to be incorporated into portable and inflatable 1.2-meter and 2.4-meter SATCOM terminals.

Net sales of Blue Force Tracking-1 ("BFT-1") sustainment services during the nine months ended April 30, 2019 were significantly higher as compared to the nine months ended April 30, 2018, primarily driven by deliveries of our next generation MT-2025 satellite transceivers, which are also known as the Blue Force Tracker-2 High Capacity ("BFT-2-HC") satellite transceivers. We continued to work with the U.S. Army with respect to our MT-2025 satellite transceivers. These transceivers meet BFT-2 protocols, provide best-in-class reliability and are fully backward compatible with the BFT-1 system. Because the amount and timing of any future MT-2025 satellite transceiver orders are difficult to predict, we have not included any net sales contributions in our updated Business Outlook for Fiscal 2019.

Net sales of our over-the-horizon microwave systems products for the nine months ended April 30, 2019 were significantly higher than the nine months ended April 30, 2018. During the third quarter of fiscal 2019, our teaming partner on a large proposal informed us that a contract award to provide troposcatter equipment to the U.S. Army was awarded to another large prime contractor and that our partner's protest was denied. Although we are disappointed in this decision, we continue to work with our partner and are now focusing our efforts on a separate procurement proposal for the U.S. Marine Corps. We have not included any net sales contributions in our updated Business Outlook for Fiscal 2019 related to this potential award.

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Geography and Customer Type

Net sales by geography and customer type, as a percentage of segment and consolidated net sales, for the nine months ended April 30, 2019 and 2018 are as follows:



	Nine months ended April 30,
	2019		2018		2019		2018		2019		2018
	Commercial Solutions				Government Solutions				Consolidated
U.S. government	20.6	%	17.7	%	66.1	%	61.0	%	42.7	%	34.0	%
Domestic	52.8	%	55.5	%	11.6	%	17.5	%	32.7	%	41.2	%
Total U.S.	73.4	%	73.2	%	77.7	%	78.5	%	75.4	%	75.2	%

International	26.6	%	26.8	%	22.3	%	21.5	%	24.6	%	24.8	%
Total	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%

Net 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 net sales include sales to commercial customers, as well as to U.S. state and local governments. Included in domestic net sales, are sales to Verizon Communications Inc. ("Verizon"). Sales to Verizon were 9.5% and 10.6%, respectively, of consolidated net sales for the nine months ended April 30, 2019 and 2018.

International net sales for the nine months ended April 30, 2019 and 2018 (which include sales to U.S. domestic companies for inclusion in products that are sold to international customers) were $121.6 million and $100.0 million, respectively. Except for the U.S., no individual country (including sales to U.S. domestic companies for inclusion in products that are sold to a foreign country) represented more than 10.0% of consolidated net sales for the nine months ended April 30, 2019 and 2018.

Gross Profit. Gross profit was $183.4 million and $161.0 million for the nine months ended April 30, 2019 and 2018, respectively. The significant increase of $22.4 million reflects significantly higher net sales in our Government Solutions segment and, to a lesser extent, higher net sales in our Commercial Solutions segment, as discussed above.

Gross profit, as a percentage of consolidated net sales, for the nine months ended April 30, 2019 was 37.0% as compared to 39.9% for the nine months ended April 30, 2018. The decrease in gross profit, as a percentage of consolidated net sales, was almost entirely driven by the significant period-to-period increase in net sales in our Government Solutions segment, as discussed above. This segment historically achieves lower gross margins than our Commercial Solutions segment. The nine months ended April 30, 2018 also included a favorable warranty settlement which resulted in a reduction of $0.7 million to cost of sales in our Unallocated segment during such period. Gross profit, as a percentage of related segment net sales, is further discussed below.

Our Commercial Solutions segment's gross profit, as a percentage of related segment net sales, for the nine months ended April 30, 2019 was slightly higher than the nine months ended April 30, 2018 due to a more favorable product mix (including deliveries of our satellite earth station equipment to the U.S. Navy). Our Business Outlook for Fiscal 2019 assumes we continue to seed and invest in the market for our Heights^TM solutions and that related sales will grow significantly from the level we achieved in fiscal 2018. Today, Heights^TM solutions have lower gross margins than our traditional Single Channel per Carrier ("SCPC") satellite earth station modems and, given expected sales growth, our gross profit, as a percentage of satellite earth station product sales in fiscal 2019, is expected to be lower as compared to fiscal 2018. Over time, we believe that margins will improve as Heights^TM volume increases. Overall, looking forward, based on the mix and anticipated timing of shipments and performance related to orders currently in our backlog and the mix and timing of expected new orders, gross profit for this segment, as a percentage of related segment net sales, for fiscal 2019 is expected to be lower than the level achieved in fiscal 2018.

Our Government Solutions segment's gross profit, as a percentage of related segment net sales, for the nine months ended April 30, 2019 was slightly lower than the level we achieved in the nine months ended April 30, 2018. This decrease was primarily due to changes in overall product mix within this segment (including deliveries of our MT-2025 satellite transceivers to the U.S. Army during the more recent period). Based on the mix and anticipated timing of shipments and performance related to orders currently in our backlog and the mix and timing of expected new orders, gross profit for this segment, as a percentage of related segment net sales, for fiscal 2019 is expected to be comparable to the level achieved in fiscal 2018.

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Included in consolidated cost of sales for the nine months ended April 30, 2019 and 2018 are provisions for excess and obsolete inventory of $2.5 million and $3.7 million, respectively. As discussed in "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies - Provisions for Excess and Obsolete Inventory," we regularly review our inventory and record a provision for excess and obsolete inventory based on historical and projected usage assumptions.

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $97.2 million and $86.1 million for the nine months ended April 30, 2019 and 2018, respectively, representing an increase of $11.1 million, or 12.9%. As a percentage of consolidated net sales, selling, general and administrative expenses were 19.6% and 21.4% for the nine months ended April 30, 2019 and 2018, respectively. The decrease, as a percentage of consolidated net sales, is primarily attributable to the significant increase in our consolidated net sales.

Selling, general and administrative expenses for the nine months ended April 30, 2019 include $1.4 million of facility exit costs as a result of our successful consolidation of our Government Solutions segment’s manufacturing facility located in Tampa, Florida with our facility in Orlando, Florida. During the nine months ended April 30, 2019, we also incurred $6.4 million of estimated contract settlement costs related to an ongoing repositioning of our enterprise technology solutions offerings in our Commercial Solutions segment that we initiated during the second quarter. Excluding such costs, our selling, general and administrative expenses for the nine months ended April 30, 2019 would have been $89.5 million, or 18.1% of consolidated net sales.

Amortization of stock-based compensation expense recorded as selling, general and administrative expenses was $3.0 million in the nine months ended April 30, 2019 as compared to $2.6 million in the nine months ended April 30, 2018. Amortization in the nine months ended April 30, 2018 includes the benefit of a $0.4 million reversal of stock-based compensation expense related to certain performance shares previously expected to be earned. Amortization of stock-based compensation is not allocated to our two reportable operating segments.

Research and Development Expenses. Research and development expenses were $40.7 million and $40.0 million for the nine months ended April 30, 2019 and 2018, respectively. As a percentage of consolidated net sales, research and development expenses were 8.2% and 9.9% for the nine months ended April 30, 2019 and 2018, respectively.

For the nine months ended April 30, 2019 and 2018, research and development expenses of $35.0 million and $34.5 million, respectively, related to our Commercial Solutions segment, and $5.5 million and $5.3 million, respectively, related to our Government Solutions segment. The remaining research and development expenses of $0.2 million for both the nine months ended April 30, 2019 and 2018, respectively, related to the amortization of stock-based compensation expense.

Whenever possible, we seek customer funding for research and development to adapt our products to specialized customer requirements. During the nine months ended April 30, 2019 and 2018, customers reimbursed us $10.6 million and $13.2 million, respectively, which is not reflected in the reported research and development expenses, but is included in net sales with the related costs included in cost of sales.

Amortization of Intangibles. Amortization relating to intangible assets with finite lives was $13.1 million (of which $10.6 million was for the Commercial Solutions segment and $2.5 million was for the Government Solutions segment) for the nine months ended April 30, 2019 and $15.8 million (of which $13.3 million was for the Commercial Solutions segment and $2.5 million was for the Government Solutions segment) for the nine months ended April 30, 2018. The decrease from $15.8 million to $13.1 million was the result of certain intangible assets in our Commercial Solutions segment that became fully amortized in fiscal 2018, offset in part by an increase in amortization relating to our acquisition of Solacom in February 2019.

Index

Settlement of Intellectual Property Litigation. During the nine months ended April 30, 2019, we recorded a $3.2 million benefit in our Unallocated segment as a result of a favorable ruling issued by the U.S. Court of Appeals for the Federal Circuit related to a legacy TCS intellectual property matter. There was no comparable adjustment in the nine months ended April 30, 2018.

Acquisition Plan Expenses. During the nine months ended April 30, 2019, we incurred $4.6 million of total acquisition plan expenses. These expenses are recorded in our Unallocated segment and primarily related to our acquisitions of Solacom and the GD NG-911 business, as discussed above. During the third quarter of fiscal 2019, we initiated efforts to acquire a small technology company whose solution offerings are complementary to our existing business and we expect to incur approximately $1.1 million of acquisition plan expenses during the fourth quarter of fiscal 2019. There is no certainty that our acquisition plan efforts will be successful.

Operating Income. Operating income for the nine months ended April 30, 2019 was $31.0 million as compared to $19.1 million for the nine months ended April 30, 2018. Operating income (loss) by reportable segment is shown in the table below:



	Nine months ended April 30,
	2019			2018		2019		2018		2019		2018		2019			2018
($ in millions)	Commercial Solutions					Government Solutions				Unallocated				Consolidated
Operating income (loss)	$	23.9		27.0		24.5		5.1		(17.4	)	(13.0	)	$	31.0		19.1
Percentage of related net sales	9.4		%	10.7	%	10.2	%	3.4	%	NA		NA		6.3		%	4.7	%

The decrease in our Commercial Solutions segment’s operating income, both in dollars and as a percentage of related segment net sales, reflects $6.4 million of estimated contract settlement costs, as discussed above. Excluding such charge, operating income in our Commercial Solutions segment for the nine months ended April 30, 2019 would have been $30.3 million, or 11.9% of related segment net sales. The increase from the nine months ended April 30, 2018, both in dollars and as a percentage of related segment net sales, was primarily due to higher net sales at higher gross margins, lower amortization of intangibles and the benefit of cost reduction actions previously initiated, offset in part by higher research and development expenses, as discussed above. Looking forward, excluding total estimated contract settlement costs, we expect fiscal 2019 operating income, both in dollars and as a percentage of related segment net sales, to be similar to fiscal 2018.

The significant increase in our Government Solutions segment’s operating income, both in dollars and as a percentage of related segment net sales, was primarily due to significantly higher net sales, offset in part by $1.4 million of facility exit costs, as discussed above. Looking forward, we expect fiscal 2019 operating income, in dollars and as a percentage of related segment net sales, to be significantly higher as compared to fiscal 2018.

The increase in unallocated expenses is primarily due to increased business and sales activity during the more recent period, incurrence of acquisition plan expenses and an increase in amortization of stock-based compensation offset in part by the benefit related to a legacy TCS intellectual property matter, as discussed above. In addition, unallocated operating expenses for the nine months ended April 30, 2018 includes the benefit of a warranty settlement, as discussed above. Amortization of stock-based compensation was $3.4 million and $2.9 million, respectively, for the nine months ended April 30, 2019 and 2018. Amortization of stock-based compensation for the nine months ended April 30, 2018 reflects a reversal of $0.4 million of stock-based compensation expense related to certain performance shares that were previously expected to be earned. Amortization of stock-based compensation can fluctuate from period-to-period based on the type and timing of stock-based awards, estimated forfeitures and the achievement of applicable performance goals.

Total amortization of stock-based compensation expense in the fourth quarter is expected to approximate $8.6 million. On an annual basis, amortization of stock-based compensation expense in fiscal 2019 is expected to approximate $12.0 million as compared to the $8.6 million amortized in fiscal 2018. This increase is largely due to an increase in the number and value of annual non-equity incentive awards expected to be granted in fiscal 2019. Our Business Outlook for Fiscal 2019 assumes that we will continue to pay certain annual non-equity incentive awards in the form of fully-vested share units, as we did in fiscal 2018 and 2017.

Index

Consolidated GAAP operating income was $31.0 million or 6.3% of consolidated net sales for the nine months ended April 30, 2019 as compared to GAAP operating income of $19.1 million or 4.7% of consolidated net sales for the nine months ended April 30, 2018.

Excluding the $6.4 million of estimated contract settlement costs, $1.4 million of facility exit costs, $4.6 million of acquisition plan expenses and $3.2 million benefit related to a legacy TCS intellectual property matter, as discussed above, consolidated operating income would have been $40.2 million, or 8.1% of consolidated net sales for the nine months ended April 30, 2019.

Looking forward, after considering the impact of all actual and expected GAAP operating expenses, consolidated GAAP operating income in fiscal 2019, in dollars, is expected to be similar to the $35.1 million and, and as a percentage of consolidated net sales is expected to be lower than the 6.2% that we achieved in fiscal 2018. Such GAAP operating income target includes the additional acquisition plan expenses and estimated contract settlement costs of approximately $2.2 million expected during the fourth quarter of fiscal 2019.

Interest Expense. Interest expense was $7.1 million and $7.6 million for the nine months ended April 30, 2019 and 2018, respectively. Our effective interest rate (including amortization of deferred financing costs) in the nine months ended April 30, 2019 was approximately 5.4%. Our current cash borrowing rate (which excludes the amortization of deferred financing costs) approximates 4.2%.

Write-off of Deferred Financing Costs. In connection with the establishment of our new Credit Facility, we wrote-off $3.2 million of deferred financing costs which primarily related to the term loan portion of our prior credit facility. See "Notes to Condensed Consolidated Financial Statements - Note (11) - Credit Facility" for further information.

Interest (Income) and Other. Interest (income) and other for both the nine months ended April 30, 2019 and 2018 was nominal. All of our available cash and cash equivalents are currently invested in bank deposits and money market deposit accounts which, at this time, are currently yielding an immaterial interest rate.

Provision For (Benefit From) Income Taxes. The provision for income taxes during the nine months ended April 30, 2019 was $1.8 million as compared to a benefit of $11.0 million for the nine months ended April 30, 2018.

During the nine months ended April 30, 2019, we recorded a net discrete tax benefit of $3.0 million, primarily related to: (i) the favorable resolution of the IRS' audit of our fiscal 2016 federal income tax return, (ii) discrete tax benefits for stock-based awards that were settled during fiscal 2019, (iii) the reversal of tax contingencies no longer required due to the expiration of applicable statutes of limitation and, (iv) the finalization of certain tax deductions in connection with the filing of our fiscal 2018 federal income tax return. Excluding discrete tax items for the nine months ended April 30, 2019, our effective tax rate was 23.0%. Our Business Outlook for Fiscal 2019 excludes the impact of any additional discrete tax items that could occur in the fourth quarter.

During the nine months ended April 30, 2018, we recorded a net discrete tax benefit of $14.1 million, resulting from the passage of Tax Reform which required us to remeasure our deferred tax assets and liabilities (including liabilities associated with the non-deductible amortization related to our intangible assets). Our effective tax rate, excluding discrete tax items, for the nine months ended April 30, 2018 was 27.0%.

Index

Our federal income tax returns for 2017 and 2018 are subject to potential future IRS audit. None of our state income tax returns prior to fiscal 2014 are subject to audit. TCS's federal income tax returns for tax year 2015 and the tax period from January 1, 2016 to February 23, 2016, the date we acquired TCS, are subject to potential future IRS audit. None of TCS's state income tax returns prior to calendar year 2014 are subject to audit. Future tax assessments or settlements could have a material adverse effect on our consolidated results of operations and financial condition.

Net Income. During the nine months ended April 30, 2019 and 2018, consolidated net income was $18.9 million and $22.3 million, respectively.

Adjusted EBITDA. Adjusted EBITDA (both in dollars and as a percentage of related net sales) for both the nine months ended April 30, 2019 and 2018 are shown in the table below (numbers in the table may not foot due to rounding):



	Nine months ended April 30,
	2019			2018		2019		2018		2019		2018		2019			2018
($ in millions)	Commercial Solutions					Government Solutions				Unallocated				Consolidated
Net income (loss)	$	23.8		26.6		24.5		5.0		(29.4	)	(9.3	)	$	18.9		22.3
Provision for (benefit from) income taxes	0.1			0.2		—		—		1.7		(11.2	)	1.8			(11.0	)
Interest (income) and other	—			0.1		—		0.1		—		—		—			0.2
Write-off of deferred financing costs	—			—		—		—		3.2		—		3.2			—
Interest expense	0.1			0.1		—		—		7.0		7.5		7.1			7.6
Amortization of stock-based compensation	—			—		—		—		3.4		2.9		3.4			2.9
Amortization of intangibles	10.6			13.3		2.5		2.5		—		—		13.1			15.8
Depreciation	6.9			7.2		1.1		1.8		0.6		0.8		8.6			9.8
Estimated contract settlement costs	6.4			—		—		—		—		—		6.4			—
Settlement of intellectual property litigation	—			—		—		—		(3.2	)	—		(3.2		)	—
Acquisition plan expenses	—			—		—		—		4.6		—		4.6			—
Facility exit costs	—			—		1.4		—		—		—		1.4			—
Adjusted EBITDA	$	47.8		47.5		29.5		9.4		(12.0	)	(9.3	)	$	65.2		47.7
Percentage of related net sales	18.8		%	18.9	%	12.2	%	6.2	%	NA		NA		13.2		%	11.8	%

The significant increase in consolidated Adjusted EBITDA, both in dollars and as a percentage of consolidated net sales, during the nine months ended April 30, 2019 as compared to the nine months ended April 30, 2018 is primarily attributable to significantly higher net sales and the benefit of cost reduction actions previously initiated, as discussed above.

The slight change in our Commercial Solutions segment's Adjusted EBITDA, both in dollars and as a percentage of related segment net sales, was primarily attributable to slightly higher net sales at higher gross margins and the benefit of cost reduction actions previously initiated, offset in part by slightly higher research and development expenses, as discussed above.

Index

A reconciliation of our fiscal 2018 GAAP Net Income to Adjusted EBITDA of $78.4 million is shown in the table below (numbers in the table may not foot due to rounding):



($ in millions)	Fiscal Year 2018
Reconciliation of GAAP Net Income to Adjusted EBITDA:
Net income	$	29.8
Income taxes	(5.1		)
Interest (income) and other	0.3
Interest expense	10.2
Amortization of stock-based compensation	8.6
Amortization of intangibles	21.1
Depreciation	13.7
Adjusted EBITDA	$	78.4

In addition, a reconciliation of our GAAP consolidated operating income, net income and net income per diluted share during the nine months ended April 30, 2019 and 2018 to the corresponding non-GAAP measures is shown in the tables below (numbers and per share amounts in the table may not foot due to rounding):



	Nine months ended April 30, 2019
($ in millions, except for per share amount)	Operating Income (Loss)			Net Income (Loss)			Net Income (Loss) per Diluted Share
Reconciliation of GAAP to Non-GAAP Earnings:
GAAP measures, as reported	$	31.0		$	18.9		$	0.78
Estimated contract settlement costs	6.4			4.9			0.20
Settlement of intellectual property litigation	(3.2		)	(2.5		)	(0.10		)
Facility exit costs	1.4			1.1			0.04
Acquisition plan expenses	4.6			3.6			0.15
Write-off of deferred financing costs	—			2.5			0.10
Net discrete tax benefit	—			(3.0		)	(0.12		)
Non-GAAP measures	$	40.2		$	25.5		$	1.05

	Nine months ended April 30, 2018
($ in millions, except for per share amount)	Operating Income (Loss)			Net Income (Loss)			Net Income (Loss) per Diluted Share
Reconciliation of GAAP to Non-GAAP Earnings:
GAAP measures, as reported	$	19.1		$	22.3		$	0.93
Net discrete tax benefit	—			(14.1		)	(0.59		)
Non-GAAP measures	$	19.1		$	8.2		$	0.34

Index

LIQUIDITY AND CAPITAL RESOURCES

Our cash and cash equivalents increased to $45.2 million at April 30, 2019 from $43.5 million at July 31, 2018, an increase of $1.7 million. The increase in cash and cash equivalents during the nine months ended April 30, 2019 was driven by the following:


•	Net cash provided by operating activities was $53.8 million and $30.6 million, respectively, for the nine months ended April 30, 2019 and 2018. The period-over-period increase in cash provided by operating activities reflects overall changes in net working capital requirements, principally the timing of shipments, billings and payments.

•

Net cash used in investing activities was $42.3 million and $5.3 million, respectively, for the nine months ended April 30, 2019 and 2018. During the nine months ended April 30, 2019, we paid $25.9 million and $10.0 million of cash in connection with the acquisitions of Solacom and the GD NG-911 business, respectively, net of cash acquired. The remaining portion of net cash used in both periods primarily represented expenditures relating to ongoing equipment upgrades and enhancements.

•

Net cash used in financing activities was $9.9 million and $23.0 million, respectively, for the nine months ended April 30, 2019 and 2018. During the nine months ended April 30, 2019, we entered into a new Credit Facility and repaid in full the outstanding borrowings under our Prior Credit Facility. During the nine months ended April 30, 2019 and 2018, we paid $7.4 million and $7.2 million, respectively, in cash dividends to our stockholders. We also made $5.0 million and $1.1 million, respectively, of payments to remit employees' statutory tax withholding requirements related to the net settlement of stock-based awards during the nine months ended April 30, 2019 and 2018.

The Credit Facility is discussed below and in "Notes to Condensed Consolidated Financial Statements - Note (11) - Credit Facility."

Our investment policy relating to our cash and cash equivalents is intended to minimize principal loss while at the same time maximize the income we receive without significantly increasing risk. To minimize risk, we generally invest our cash and cash equivalents in money market mutual funds (both government and commercial), certificates of deposit, bank deposits, and U.S. Treasury securities. Many of our money market mutual funds invest in direct obligations of the U.S. government, bank securities guaranteed by the Federal Deposit Insurance Corporation, certificates of deposit and commercial paper and other securities issued by other companies. While we cannot predict future market conditions or market liquidity, we believe our investment policies are appropriate in the current environment. Ultimately, the availability of our cash and cash equivalents is dependent on a well-functioning liquid market.

Index

As of April 30, 2019, our material short-term cash requirements primarily consist of: (i) estimated interest payments under our Credit Facility; (ii) payments related to our capital lease and other obligations; (iii) operating lease commitments; (iv) our ongoing working capital needs, including income tax payments; and (v) payment of accrued quarterly dividends. During our third quarter of fiscal 2019, we initiated an acquisition plan for another small but growing technology solutions company. If our acquisition plan is successful, we may be required to pay for such acquisition primarily with existing cash and cash equivalents and increased borrowings under our Credit Facility.

In connection with an original $175.0 million shelf registration filed with the SEC on December 15, 2015, we sold 7.1 million shares of our common stock in a public offering at a price of $14.00 per share in June 2016, resulting in proceeds to us of $95.0 million, net of underwriting discounts and commissions. In December 2018, we filed a new $400.0 million shelf registration with the SEC for the sale of various types of securities, including debt. The new shelf registration was declared effective by the SEC as of December 14, 2018.

As of April 30, 2019 and June 5, 2019, we were authorized to repurchase up to an additional $8.7 million of our common stock, pursuant to our current $100.0 million stock repurchase program. Our stock repurchase program has no time restrictions and repurchases may be made in open-market or privately negotiated transactions and may be made pursuant to SEC Rule 10b5-1 trading plans. There were no repurchases of our common stock during the three or nine months ended April 30, 2019 or 2018.

On September 26, 2018, December 6, 2018 and March 6, 2019 our Board of Directors declared a dividend of $0.10 per common share, which was paid on November 16, 2018, February 15, 2019 and May 17, 2019, respectively. On June 5, 2019, our Board of Directors declared a dividend of $0.10 per common share, payable on August 16, 2019 to stockholders of record at the close of business on July 17, 2019. Future dividends remain subject to compliance with financial covenants under our Credit Facility as well as Board approval.

Our material long-term cash requirements primarily consist of: (i) mandatory interest payments pursuant to our Credit Facility; (ii) payments relating to our capital lease and other obligations; and (iii) operating lease commitments.

We have historically met both our short-term and long-term cash requirements with funds provided by a combination of cash and cash equivalent balances, cash generated from operating activities and cash generated from financing transactions. Based on our anticipated level of future sales and operating income, we believe that our existing cash and cash equivalent balances, our cash generated from operating activities and amounts potentially available under our Credit Facility will be sufficient to meet both our currently anticipated short-term and long-term operating cash requirements.

Although it is difficult in the current economic and credit environment to predict the terms and conditions of financing that may be available in the future, should our short-term or long-term cash requirements increase beyond our current expectations, we believe that we would have sufficient access to credit from financial institutions and/or financing from public and private debt and equity markets.

Credit Facility

The new Credit Facility provides a senior secured loan facility of up to $550.0 million consisting of: (i) a revolving loan facility ("Revolving Loan Facility") with a borrowing limit of $300.0 million; (ii) an accordion feature allowing us to borrow up to an additional $250.0 million; (iii) a $35.0 million letter of credit sublimit; and (iv) a swingline loan credit sublimit of $25.0 million.

The Credit Facility matures on October 31, 2023 (the "Revolving Maturity Date"). If we issue new unsecured debt in excess of $5.0 million 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 new Credit Facility were used, in part, to repay in full the outstanding borrowings under the Prior Credit Facility, and additional proceeds of the Credit Facility are expected to be used by us for working capital and other general corporate purposes. As of April 30, 2019, the amount outstanding under our Credit Facility was $173.5 million, which is reflected in the non-current portion of long-term debt on our Condensed Consolidated Balance Sheet. As of April 30, 2019, we had $1.8 million of standby letters of credit outstanding under our Credit Facility related to our guarantees of future performance on certain customer contracts and no outstanding commercial letters of credit. Since October 31, 2018, we had outstanding balances under the new Credit Facility, ranging from $150.0 million to $184.0 million. In addition, we had outstanding balances under the Revolving Loan Facility of the Prior Credit Facility, ranging from $34.9 million to $63.8 million during the three months ended October 31, 2018.

Index

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.

OFF-BALANCE SHEET ARRANGEMENTS

As of April 30, 2019, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.

COMMITMENTS

In the normal course of business, other than as discussed below, we routinely enter into binding and non-binding purchase obligations primarily covering anticipated purchases of inventory and equipment. We do not expect that these commitments, as of April 30, 2019, will materially adversely affect our liquidity.

Index

At April 30, 2019, cash payments due under long-term obligations (including estimated interest expense on our Credit Facility and capital lease and other obligations), excluding purchase orders that we entered into in our normal course of business, are as follows:



	Obligations Due by Fiscal Years or Maturity Date (in thousands)
	Total		Remainder of 2019	2020 and 2021	2022 and 2023	After 2023
Credit Facility - principal payments	$	173,500	—	—	—	173,500
Credit Facility - interest payments	34,264		1,892	15,240	15,240	1,892
Operating lease commitments	43,670		2,751	18,313	11,630	10,976
Capital lease and other obligations	1,513		733	780	—	—
Net contractual cash obligations	$	252,947	5,376	34,333	26,870	186,368

As discussed further in "Notes to Condensed Consolidated Financial Statements - Note (11) - Credit Facility," on October 31, 2018, we entered into a new Credit Facility, replacing our Prior Credit Facility dated as of February 23, 2016. The new Credit Facility provides a senior secured loan facility of up to $550.0 million consisting of: (i) a revolving loan facility ("Revolving Loan Facility") with a borrowing limit of $300.0 million; (ii) an accordion feature allowing us to borrow up to an additional $250.0 million; (iii) a $35.0 million letter of credit sublimit; and (iv) a swingline loan credit sublimit of $25.0 million. The Credit Facility matures on October 31, 2023 (the "Revolving Maturity Date"). In addition, if we issue new unsecured debt in excess of $5.0 million 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.

As discussed further in "Notes to Condensed Consolidated Financial Statements - Note (18) - Stockholders’ Equity," on June 5, 2019, our Board of Directors declared a dividend of $0.10 per common share, payable on August 16, 2019 to stockholders of record at the close of business on July 17, 2019. Future dividends remain subject to compliance with financial covenants under our Credit Facility as well as Board approval.

At April 30, 2019, we have approximately $1.8 million of standby letters of credit outstanding under our Credit Facility related to our guarantees of future performance on certain customer contracts. Such amounts are not included in the above table.

In fiscal 2018, we entered into a full and final warranty settlement with AT&T, the largest customer/distributor of a small product line that we refer to as the TCS 911 call handling software solution. As discussed in "Notes to Condensed Consolidated Financial Statements - Note (9) - Accrued Expenses and Other Current Liabilities," pursuant to the settlement agreement, we issued thirty-six credits to AT&T of $0.2 million which AT&T can apply on a monthly basis to purchases of solutions from us, beginning October 2017 through September 2020. As of April 30, 2019, the total present value of these monthly credits is $2.4 million, of which $1.7 million is included in accrued expenses and other current liabilities and $0.7 million is reflected in other liabilities (non-current) on our Condensed Consolidated Balance Sheet. These amounts are not shown in the above commitment table.

As discussed in "Notes to Condensed Consolidated Financial Statements - Note (10) - Cost Reduction Actions," during the three months ended October 31, 2018, we exited our Government Solutions segment's manufacturing facility located in Tampa, Florida and recorded a related charge of $1.4 million in selling, general and administrative expenses on our Condensed Consolidated Statement of Operations. As of April 30, 2019, the remaining estimated facility exit costs amounted to $1.0 million, of which $0.6 million and $0.4 million, respectively, was included in "accrued expenses and other current liabilities" and "other liabilities (non-current)" on our Condensed Consolidated Balance Sheet. Such amounts are not shown in the above commitment table.

In the ordinary course of business, we include indemnification provisions in certain of our customer contracts. Pursuant to these agreements, we have agreed to indemnify, hold harmless and reimburse the indemnified party for certain losses suffered or incurred by the indemnified party, including but not limited to losses related to third-party intellectual property claims. It is not possible to determine the maximum potential amount under these agreements due to a history of nominal claims in the Comtech legacy business and the unique facts and circumstances involved in each particular agreement. As discussed further in "Notes to Condensed Consolidated Financial Statements - Note (19) - Legal Proceedings and Other Matters," TCS is subject to a number of indemnification demands and we are incurring ongoing legal expenses in connection with these matters. Our insurance policies may not cover the cost of defending indemnification claims or providing indemnification. As a result, pending or future claims asserted against us by a party that we have agreed to indemnify could result in legal costs and damages that could have a material adverse effect on our consolidated results of operations and financial condition.

Index

We have change in control agreements, severance agreements and indemnification agreements with certain of our executive officers and certain key employees. All of these agreements may require payments by us, in certain circumstances, including, but not limited to, a change in control of our Company or an involuntary termination of employment without cause.

Our Condensed Consolidated Balance Sheet as of April 30, 2019 includes total liabilities of $7.0 million for uncertain tax positions, including interest, any or all of which may result in a cash payment. The future payments related to uncertain tax positions have not been presented in the table above due to the uncertainty of the amounts and timing of any potential cash settlement with the taxing authorities.

RECENT ACCOUNTING PRONOUNCEMENTS

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

As further discussed in "Notes to Condensed Consolidated Financial Statements - Note (3) - Adoption of Accounting Standards and Updates," during the nine months ended April 30, 2019, we adopted:


•	FASB ASU No. 2014-09 "Revenue from Contracts with Customers (Topic 606)." See "Notes to Condensed Consolidated Financial Statements - Note (4) -Revenue," for further information.

•

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

Index

In addition, the following FASB ASUs have been issued and incorporated into the FASB ASC and have not yet been adopted by us as of April 30, 2019:

•

FASB ASU No. 2016-02, issued in February 2016, which requires lessees to recognize the following for all leases (with the exception of short-term leases): (i) a lease liability, which is a lessee's obligation to make lease payments arising from a lease, initially measured at the present value of the lease payments; and (ii) a right-of-use asset, which is an asset that represents the lessee's right to use a specified asset for the lease term. In January 2018, FASB ASU No. 2018-01 was issued to permit an entity to elect an optional transition practical expedient to not evaluate under Topic 842 land easements that exist or expired before the entity’s adoption of Topic 842. In July 2018, the FASB issued ASU Nos. 2018-10 and 2018-11, which provide further codification improvements and relieves the requirement to present prior comparative year results when adopting the new lease standard. Instead, companies can choose to recognize the cumulative-effect of applying the new standard to leased assets and liabilities as an adjustment to opening retained earnings. In December 2018, FASB ASU No. 2018-20 was issued to simplify the implementation of Topic 842 for lessors as it relates to sales taxes, lessor costs paid directly by the lessee and recognition of variable payments for contracts with lease and non-lease components. In March 2019, FASB ASU No. 2019-01 was issued, which addresses: (1) determining the fair value of the underlying asset by lessors that are not manufacturers or dealers; (2) presentation of sales types and direct financing leases on the statement of cash flows; and (3) transition disclosures related to Topic 250, Accounting Changes and Error Corrections. This latest ASU specifically provides an exception to the paragraph 250-10-50-3 that would otherwise have required interim disclosures in the period of an accounting change including the effect of that change on income from continuing operations, net income, any other financial statement line item, and any affected per share amounts. These ASUs are effective for fiscal years beginning after December 15, 2018 (our fiscal year beginning on August 1, 2019), including interim periods within those fiscal years and should be applied with a modified retrospective approach. Early adoption is permitted.

During the third quarter of fiscal 2019, our project team continued to perform a detailed evaluation of the operational impact of these ASUs, which transition approach to use and the overall adoption impact on our consolidated financial statements and disclosures. We expect our evaluation to be completed shortly before our first quarter of fiscal 2020.

•

FASB ASU No. 2016-13 issued in June 2016 and ASU No. 2018-19 issued in November 2018, which require the measurement of expected credit losses for financial assets held at the reporting date to be based on historical experience, current conditions and reasonable and supportable forecasts. In April 2019, FASB ASU No. 2019-04 was issued to provide clarification guidance in the following areas: (i) accrued interest; (ii) recoveries; (iii) projections of the interest rate environment; (iv) consideration of prepayments; and (v) other topics. In May 2019, FASB ASU No. 2019-05 was issued to provide entities with an option to irrevocably elect the fair value option applied on an instrument by instrument basis for eligible instruments. These ASUs are effective for fiscal years beginning after December 15, 2019 (our fiscal year beginning on August 1, 2020), including interim periods within those fiscal years. All entities may adopt the amendments in this ASU earlier as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Except for a prospective transition approach required for debt securities for which an other-than-temporary impairment had been recognized before the effective date, an entity will apply the amendments in this ASU through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, on a modified-retrospective approach). We are evaluating the impact of this ASU on our condensed consolidated financial statements and disclosures.

•

FASB ASU No. 2017-11, issued in July 2017, which provides guidance on the accounting for certain financial instruments with embedded features that result in the strike price of the instrument or embedded conversion option being reduced on the basis of the pricing of future equity offerings (commonly referred to as "down round" features). This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 (our fiscal year beginning on August 1, 2019) and early adoption is permitted, including adoption in an interim period. This ASU should be applied retrospectively in accordance with the provisions of the ASU. We are evaluating the impact of this ASU on our condensed consolidated financial statements and disclosures; however, we do not expect the adoption to have any effect given that we currently do not have any financial instruments with such "down round" features.

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FASB ASU No. 2017-12, issued in August 2017, which expands and refines hedge accounting for both nonfinancial 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. This ASU is effective for fiscal years beginning after December 15, 2018 (our fiscal year beginning on August 1, 2019) and for interim periods therein, with early adoption permitted. We are evaluating the impact of this ASU on our condensed consolidated financial statements and disclosures; however, we do not expect the adoption to have any effect given that we are currently not a party to any such hedging transactions.

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FASB ASU No. 2018-07, issued in June 2018, which expands the scope of Topic 718 to include certain share-based payment transactions for acquiring goods and services from nonemployees. This ASU is effective for fiscal years beginning after December 15, 2018 (our fiscal year beginning on August 1, 2019), including interim periods within that fiscal year. Early adoption is permitted. An entity should only remeasure liability-classified awards that have not been settled by the date of adoption and equity-classified awards for which a measurement date has not been established, through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. We are evaluating the impact of this ASU on our condensed consolidated financial statements and disclosures; however, we do not expect the adoption to have any effect given that we currently do not have any such outstanding share-based awards with nonemployees.

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FASB ASU No. 2018-13, issued in August 2018, which modifies the disclosure requirements for fair value measurements in Topic 820. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 (our fiscal year beginning on August 1, 2020). Upon the effective date, certain provisions are to be applied prospectively, while others are to be applied retrospectively to all periods presented. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this ASU and delay adoption of the additional disclosures until their effective date. We are evaluating the impact of this ASU on our condensed consolidated financial statement disclosures.

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FASB ASU No. 2018-15, issued in August 2018, 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. This ASU is effective for fiscal years beginning after December 15, 2019 (our fiscal year beginning on August 1, 2020), and interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period. This ASU should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. We are evaluating the impact of this ASU on our condensed consolidated financial statements and disclosures.

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FASB ASU No. 2018-16, issued in October 2018, 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. This ASU is effective for fiscal years beginning after December 15, 2018 (our fiscal year beginning on August 1, 2019) and for interim periods therein, with early adoption permitted. We are evaluating the impact of this ASU on our condensed consolidated financial statements and disclosures; however, we do not expect the adoption to have any effect given that we are currently not a party to any such hedging transactions.

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FASB ASU No. 2018-17, issued in October 2018, 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. This ASU is effective for fiscal years beginning after December 15, 2019 (our fiscal year beginning on August 1, 2020) and for interim periods therein, with early adoption permitted. We are evaluating the impact of this ASU on our condensed consolidated financial statements and disclosures; however, we do not expect the adoption to have any effect given that we currently do not have any indirect interests held through related parties in common control.

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FASB ASU No. 2018-18, issued in November 2018, 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. This ASU is effective for fiscal years beginning after December 15, 2019 (our fiscal year beginning on August 1, 2020) and for interim periods therein, with early adoption permitted. We are evaluating the impact of this ASU on our condensed consolidated financial statements and disclosures; however, we do not expect the adoption to have any effect given that we are currently not engaged in such collaborative arrangement transactions.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our earnings and cash flows are subject to fluctuations due to changes in interest rates primarily from borrowings under our Credit Facility. Based on the amount of outstanding debt under our Credit Facility, a hypothetical change in interest rates by 10% would change interest expense by approximately $0.7 million over a one-year period. Although we do not currently use interest rate derivative instruments to manage exposure to interest rate changes, we may choose to do so in the future in connection with our Credit Facility.

Our earnings and cash flows are also subject to fluctuations due to changes in interest rates on our investment of available cash balances. As of April 30, 2019, we had cash and cash equivalents of $45.2 million, which consisted of cash and highly-liquid money market deposit accounts. Many of these investments are subject to fluctuations in interest rates, which could impact our results. Based on our investment portfolio balance as of April 30, 2019, a hypothetical change in interest rates of 10% would have a nominal impact on interest income over a one-year period. Ultimately, the availability of our cash and cash equivalents is dependent on a well-functioning liquid market.

Item 4. Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934), was carried out by us under the supervision and with the participation of our management, including our President, Chief Executive Officer and Chairman and Chief Financial Officer. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by the report to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to management, as appropriate, to allow timely decisions regarding required disclosure. A system of controls, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the system of controls are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

There have been no changes in our internal controls over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

The certifications of our President, Chief Executive Officer and Chairman and Chief Financial Officer, that are Exhibits 31.1 and 31.2, respectively, should be read in conjunction with the foregoing information for a more complete understanding of the references in those Exhibits to disclosure controls and procedures and internal control over financial reporting.

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PART II

OTHER INFORMATION

Item 1. Legal Proceedings

See "Notes to Condensed Consolidated Financial Statements - Note (19) - Legal Proceedings and Other Matters," of this Form 10-Q for information regarding legal proceedings and other matters.

Item 1A. Risk Factors

There have been no material changes from the risk factors previously disclosed in our Form 10-K for the fiscal year ended July 31, 2018.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On February 28, 2019, in connection with the completion of our acquisition of Solacom Technologies Inc. for cash and shares of our common stock, we issued 208,669 shares of common stock at a volume weighted average price of $26.86 per share. The shares of our common stock issued in connection with the acquisition were issued in reliance upon Section 3(a)(10) of the Securities Act of 1933, as amended, which exempts from the registration requirements any security that is issued in exchange for one or more bona fide outstanding securities where the terms and conditions of such issuance and exchange are approved, after a hearing upon the fairness of such terms and conditions at which all persons to whom it is proposed to issue securities in such exchange shall have the right to appear, by any court expressly authorized by law to grant such approval. The exchange of shares of Comtech’s common stock as part of the total consideration for shares of Solacom Technologies Inc. was approved by the Superior Court of Canada, Province of Quebec, District of Montreal. See "Notes to Condensed Consolidated Financial Statements - Note (2) - Acquisitions" for further information concerning the acquisition.

Item 4. Mine Safety Disclosures

Not applicable.

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Item 6. Exhibits

Exhibit 31.1 - Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 31.2 - Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 32.1 - Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Exhibit 32.2 - Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Exhibit 101.INS - XBRL Instance Document

Exhibit 101.SCH - XBRL Taxonomy Extension Schema Document

Exhibit 101.CAL - XBRL Taxonomy Extension Calculation Linkbase Document

Exhibit 101.LAB - XBRL Taxonomy Extension Labels Linkbase Document

Exhibit 101.PRE - XBRL Taxonomy Extension Presentation Linkbase Document

Exhibit 101.DEF - XBRL Taxonomy Extension Definition Linkbase Document

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

COMTECH TELECOMMUNICATIONS CORP.

(Registrant)




Date:	June 5, 2019	By: /s/ Fred Kornberg
		Fred Kornberg
		Chairman of the Board
		Chief Executive Officer and President
		(Principal Executive Officer)


Date:	June 5, 2019	By: /s/ Michael A. Bondi
		Michael A. Bondi
		Chief Financial Officer
		(Principal Financial and Accounting Officer)