COMTECH TELECOMMUNICATIONS CORP /DE/ 10-Q

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, potential transactions, 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 risk that the acquisition of UHP Networks Inc. and its sister company (together, "UHP") may not be consummated for reasons including that the conditions precedent to the completion of this acquisition may not be satisfied or the occurrence of any event, change or circumstance could give rise to the termination of the agreement; the risk that the regulatory approval related to UHP will not be obtained; the possibility that the expected synergies from recent or pending acquisitions will not be fully realized, or will not be realized within the anticipated time periods; the risk that acquired businesses will not be integrated with Comtech successfully; the possibility of disruption from recent or pending 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 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 expanding sales of Comtech's Heights TM Network Platform ("HEIGHTS"); 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; risks associated with the COVID-19 pandemic; 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 - offers satellite ground station technologies (such as modems and amplifiers), public safety and location technologies (such as 911 call routing, 911 call handling and mapping solutions) to commercial customers and smaller government customers, such as state and local governments. This segment also serves certain large government customers (including the U.S. government) that have requirements for off-the-shelf commercial equipment. • Government Solutions - provides mission-critical technologies (such as tactical satellite-based networks and ongoing support for complicated communication networks) and high-performance transmission technologies (such as troposcatter systems and solid-state, high-power amplifiers) to large government end-users (including those of foreign countries), large international customers and domestic prime contractors. 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. 31 Index 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. In accordance with FASB ASC 606 - Revenue from Contracts with Customers ("ASC 606"), we record revenue in an amount that reflects the consideration to which we expect to be entitled in exchange for goods or services promised to customers. Under ASC 606, we follow a five-step model to: (1) identify the contract with our customer; (2) identify our performance obligations in our contract; (3) determine the transaction price for our contract; (4) allocate the transaction price to our performance obligations; and (5) recognize revenue using one of the following two methods: • Over time - We recognize revenue using the over time method when there is a continuous transfer of control to the customer over the contractual period of performance. This generally occurs when we enter into a long-term contract relating to the design, development or manufacture of complex equipment or technology platforms to a buyer’s specification (or to provide services related to the performance of such contracts). Continuous transfer of control is typically supported by contract clauses which allow our customers to unilaterally terminate a contract for convenience, pay for costs incurred plus a reasonable profit and take control of work-in-process. Revenue recognized over time is generally based on the extent of progress toward completion of the related performance obligations. The selection of the method to measure progress requires judgment and is based on the nature of the products or services provided. In certain instances, typically for firm fixed-price contracts, we use the cost-to-cost measure because it best depicts the transfer of control to the customer which occurs as we incur costs on our contracts. Under the cost-to-cost measure, the extent of progress toward completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion, including warranty costs. Revenues, including estimated fees or profits, are recorded proportionally as costs are incurred. Costs to fulfill generally include direct labor, materials, subcontractor costs, other direct costs and an allocation of indirect costs. When these contracts are modified, the additional goods or services are generally not distinct from those already provided. As a result, these modifications form part of an existing contract and we must update the transaction price and our measure of progress for the single performance obligation and recognize a cumulative catch-up to revenue and gross profits. For over time contracts using a cost-to-cost measure of progress, we have an estimate at completion ("EAC") process in which management reviews the progress and execution of our performance obligations. This EAC process requires management judgment relative to assessing risks, estimating contract revenue and costs, and making assumptions for schedule and technical issues. Since certain contracts extend over a long period of time, the impact of revisions in revenue and or cost estimates during the progress of work may impact current period earnings through a cumulative adjustment. Additionally, if the EAC process indicates a loss, a provision is made for the total anticipated loss in the period that it becomes evident. Contract revenue and cost estimates for significant contracts are generally reviewed and reassessed at least quarterly. The cost-to-cost method is principally used to account for contracts in our mission-critical technologies and high-performance transmission technologies product lines and, to a lesser extent, certain location-based and messaging infrastructure contracts in our public safety and location technologies product line. For service-based contracts in our public safety and location technologies product line, we recognize revenue over time. These services are typically recognized as a series of services performed over the contract term using the straight-line method, or based on our customers’ actual usage of the networks and platforms which we provide. • Point in time - When a performance obligation is not satisfied over time, we must record revenue using the point in time accounting method which generally results in revenue being recognized upon shipment or delivery of a promised good or service to a customer. This generally occurs when we enter into short term contracts or purchase orders where items are provided to customers with relatively quick turn-around times. Modifications to such contracts and or purchase orders, which typically provide for additional quantities or services, are accounted for as a new contract because the pricing for these additional quantities or services are based on standalone selling prices. 32 Index Point in time accounting is principally applied to contracts in our satellite ground station technologies product line (which includes satellite modems, solid-state and traveling wave tube amplifiers) and certain contracts for our solid-state, high-power amplifiers in our high-performance transmission technologies product line. Point in time accounting is also applied to certain contracts in our mission-critical technologies product line. The contracts related to these product lines do not meet the requirements for over time revenue recognition because our customers cannot utilize the equipment for its intended purpose during any phase of our manufacturing process; customers do not simultaneously receive and or consume the benefits provided by our performance; customers do not control the asset (i.e., prior to delivery, customers cannot direct the use of the asset, sell or exchange the equipment, etc.); and, although many of our contracts have termination for convenience clauses and or an enforceable right to payment for performance completed to date, our performance creates an asset with an alternative use through the point of delivery. In determining that our equipment has alternative use, we considered the underlying manufacturing process for our products. In the early phases of manufacturing, raw materials and work in process (including subassemblies) consist of common parts that are highly fungible among many different types of products and customer applications. Finished products are either configured to our standard configuration or based on our customers’ specifications. Finished products, whether built to our standard specification or to a customers’ specification, can be sold to a variety of customers and across many different end use applications with minimal rework, if needed, and without incurring a significant economic loss. When identifying a contract with our customer, we consider when it has approval and commitment from both parties, if the rights of the parties are identified, if the payment terms are identified, if it has commercial substance and if collectability is probable. When identifying performance obligations, we consider whether there are multiple promises and how to account for them. In our contracts, multiple promises are separated if they are distinct, both individually and in the context of the contract. If multiple promises in a contract are highly interrelated or comprise a series of distinct services performed over time, they are combined into a single performance obligation. In some cases, we may also provide the customer with an additional service-type warranty, which we recognize as a separate performance obligation. Service-type warranties do not represent a significant portion of our consolidated net sales. When service-type warranties represent a separate performance obligation, the revenue is deferred and recognized ratably over the extended warranty period. Our contracts, from time-to-time, may also include options for additional goods and services. To date, these options have not represented material rights to the customer as the pricing for them reflects standalone selling prices. As a result, we do not consider options we offer to be performance obligations for which we must allocate a portion of the transaction price. In many cases, we provide assurance-type warranty coverage for some of our products for a period of at least one year from the date of delivery. When identifying the transaction price, we typically utilize the contract's stated price as a starting point. The transaction price in certain arrangements may include estimated amounts of variable consideration, including award fees, incentive fees or other provisions that can either increase or decrease the transaction price. We estimate variable consideration as the amount to which we expect to be entitled, and we include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the estimation uncertainty is resolved. The estimation of this variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information (e.g., historical, current and forecasted) that is reasonably available to us. When allocating the contract’s transaction price, we consider each distinct performance obligation. For contracts with multiple performance obligations, we allocate the contract’s transaction price to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract. We determine standalone selling price based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, we estimate the standalone selling price taking into account available information such as market conditions, including geographic or regional specific factors, competitive positioning, internal costs, profit objectives and internally approved pricing guidelines related to the performance obligations. 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. 33 Index The timing of revenue recognition, billings and collections results in receivables, unbilled receivables and contract liabilities on our Condensed Consolidated Balance Sheet. Under typical payment terms for our contracts accounted for over time, amounts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals (e.g., monthly) or upon achievement of contractual milestones. For certain contracts with provisions that are intended to protect customers in the event we do not satisfy our performance obligations, billings occur subsequent to revenue recognition, resulting in unbilled receivables. Under ASC 606, unbilled receivables constitute contract assets. 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. We recognize the incremental costs to obtain or fulfill a contract as an expense when incurred if the amortization period of the asset is one year or less. Incremental costs to obtain or fulfill contracts with an amortization period greater than one year were not material. As commissions payable to our internal sales and marketing employees or contractors are contingent upon multiple factors, such commissions are not considered direct costs to obtain or fulfill a contract with a customer and are expensed as incurred in selling, general and administrative expenses on our Condensed Consolidated Statements of Operations. As for commissions payable to our third-party sales representatives related to 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. Impairment of Goodwill and Other Intangible Assets . As of October 31, 2020, total goodwill recorded on our Condensed Consolidated Balance Sheet aggregated $331.5 million (of which $256.5 million relates to our Commercial Solutions segment and $75.0 million relates to our Government Solutions segment). Additionally, as of October 31, 2020, net intangibles recorded on our Condensed Consolidated Balance Sheet aggregated $252.5 million (of which $203.8 million relates to our Commercial Solutions segment and $48.7 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. In accordance with FASB ASC 350, 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. On August 1, 2020 (the first day of our fiscal 2021), 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, including both the potential short-term and long-term effects of the COVID-19 pandemic. 34 Index 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, which reflects our estimate of stable, perpetual growth. We then calculated a present value of the respective cash flows for each reporting unit to arrive at an estimate of fair value under the income approach. Under the market approach, we estimated a fair value based on comparable companies' market multiples of revenues and earnings before interest, taxes, depreciation and amortization and factored in a control premium. Finally, we compared our estimates of fair values to our August 1, 2020 total public market capitalization and assessed implied control premiums based on our common stock price of $16.42 as of August 1, 2020. 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 8.4% and 78.0%, 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 2021 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 further. Such deterioration could be caused by uncertainty about the severity and length of the COVID-19 pandemic, and its impact on global business activity. 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 2021 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, 2021 (the start of our fiscal 2022). 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 October 31, 2020. 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 potential interest and penalties related to uncertain tax positions in income tax expense. The U.S. federal government is our most significant income tax jurisdiction. 35 Index 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 research and experimentation tax credit carryforwards, some 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. Our federal income tax returns for fiscal 2017 through 2019 are subject to potential future Internal Revenue Service ("IRS") audit. None of our state income tax returns prior to fiscal 2016 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 projected usage trends. Other factors may also influence our provision, including decisions to exit a product line, technological change and new product development. These factors could result in a change in the amount of excess and obsolete inventory on hand. Additionally, our estimates of future product demand may prove to be inaccurate, in which case we may have understated or overstated the provision required for excess and obsolete inventory. In the future, if we determine that our inventory was overvalued, we would be required to recognize such costs in our financial statements at the time of such determination. Any such charge could be material to our results of operations and financial condition. Allowance for Doubtful Accounts. We perform credit evaluations of our customers and adjust credit limits based upon customer payment history and current creditworthiness, as determined by our review of our customers’ current credit information. Generally, we will require cash in advance or payment secured by irrevocable letters of credit before an order is accepted from an international customer that we do not do business with regularly. In addition, we seek to obtain insurance for certain domestic and international customers. We monitor collections and payments from our customers and maintain an allowance for doubtful accounts based upon our historical experience and any specific customer collection issues that we have identified. In light of ongoing tight credit market conditions, we continue to see requests from our customers for higher credit limits and longer payment terms. Because of our strong cash position and the nominal amount of interest we are earning on our cash and cash equivalents, we have, on a limited basis, approved certain customer requests. We continue to monitor our accounts receivable credit portfolio. To-date, there has been no material changes in our credit portfolio as a result of the COVID-19 pandemic and related worldwide restrictions on business activities. Although our overall credit losses have historically been within the allowances we established, we cannot accurately predict our future credit loss experience, given the current poor business environment. Measurement of credit losses requires consideration of historical loss experience, including the need to adjust for changing business conditions, and judgments about the probable effects of relevant observable data, including present economic conditions such as delinquency rates and the financial health of specific customers. Future changes to the estimated allowance for doubtful accounts could be material to our results of operations and financial condition. 36 Index Impact of COVID-19 and Business Outlook for Fiscal 2021 Despite the second wave of the COVID-19 pandemic, fiscal 2021 is off to a good start, as our net sales and Adjusted EBITDA exceeded our expectations. During the first quarter of fiscal 2021, we generated consolidated: • Net sales of $135.2 million; • GAAP operating loss of $85.7 million, or Non-GAAP operating income of $5.5 million when excluding $91.2 million of acquisition plan expenses; • GAAP net loss of $85.8 million, or Non-GAAP net income of $3.7 million when excluding acquisition plan expenses of $88.3 million (net of tax), incremental interest expense associated with ticking fees of $1.0 million (net of tax) and a net discrete tax expense of $0.2 million; • Net cash used in operating activities of $74.2 million; and • Adjusted EBITDA (a Non-GAAP financial measure discussed below) of $14.3 million. We achieved a consolidated book-to-bill ratio (a measure defined as bookings divided by net sales) of 0.91 and finished the first quarter with consolidated backlog of $605.5 million. Our backlog (sometimes referred to herein as orders or bookings) is more fully defined in our most recent Annual Report on Form 10-K filed with SEC and the total value of multi-year contracts that we have received is substantially higher than our reported backlog. As of October 31, 2020, our cash and cash equivalents were $32.5 million and our total debt outstanding was $217.0 million. Our second quarter of fiscal 2021 has started off strong. As announced on November 23, 2020, we were awarded a statewide contract valued at up to $175.1 million to design, deploy, and operate NG-911 services for the Commonwealth of Pennsylvania. Our pipeline remains strong and if business momentum continues, we would anticipate a book-to-bill ratio in excess of 1.0 for fiscal 2021. Nevertheless, COVID-19 is still impacting our business and we are seeing increased spikes of COVID-19 in almost all of the geographic areas in which we operate. As such, we continue to conduct most of our non-production related operations using remote working arrangements, have curtailed most business travel, and have established social distancing safeguards. These precautions and business practices are expected to remain in effect so long as government advisories recommend. Additionally, we have experienced order delays, production delays, minor supply chain disruptions, lower levels of factory utilization and higher logistics and operational costs. Although the COVID-19 pandemic is by no means over and additional waves of COVID-19 could again alter the business landscape, we believe that the pandemic’s worst impact on our business is largely behind us. As the vaccine for COVID-19 becomes widely available, we believe that business conditions will improve. With our diversified customer base, product leadership positions and mounting prospects, we still expect that consolidated net sales in fiscal 2021 will be higher than the amount we achieved in fiscal 2020. Given overall mix changes and increased costs associated with operating our business during the COVID-19 pandemic, we now expect Adjusted EBITDA in fiscal 2021 to be similar to the amounts we achieved in fiscal 2020. Our long-term fundamentals remain strong as we continue to believe we are well-positioned for growth as business conditions meaningfully improve. Because the amount of acquisition plan expenses remains largely unpredictable and given the pandemic's continued impact on global business conditions, we are not providing any GAAP operating income, GAAP net income or GAAP EPS guidance or a reconciliation of our projected results to the most comparable GAAP measure, as such a reconciliation cannot be prepared without unreasonable effort. For the same reasons, we are unable to address the probable significance of the unavailable information, which could be material to future results. Our Business Outlook for Fiscal 2021 does not consider the financial impact of the pending UHP acquisition or other expenses related to future actions we may take in order to achieve our strategic objectives. The UHP acquisition is discussed in the below section entitled “ Acquisition Plan Update .” Additionally, during the remainder of fiscal 2021, we expect to shift production of many of our key satellite earth station products from our existing Tempe, Arizona locations to a new 146,000 square foot facility in Chandler, Arizona. This new facility, which is located less than 10 miles from our current facilities, is expected to support our anticipated growth and long-term business goals for our satellite earth station product line. In November 2020, we also signed a 10-year facility lease in the United Kingdom to expand our Government Solutions segment's manufacturing capabilities for high precision full motion fixed and mobile X/Y satellite tracking antennas, RF feeds, reflectors and radomes. In connection with these new leases, we expect to incur restructuring costs of approximately $2.0 million in fiscal 2021, the majority of which are expected to be recorded as cost of sales. 37 Index On December 9, 2020, our Board of Directors declared a dividend of $0.10 per common share, payable on February 19, 2021 to stockholders of record at the close of business on January 20, 2021. Future Common Stock 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 2021 and a definition and explanation of Adjusted EBITDA is included in the below section "Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Comparison of the Results of Operations for the three months ended October 31, 2020 and 2019." Acquisition Plan Update UHP Networks, Inc. In November 2019, we entered into an agreement to acquire UHP Networks Inc. and its sister company (together, “UHP”), a leading provider of innovative and disruptive satellite ground station technology solutions. UHP is based in Canada and has developed revolutionary technology that we believe is transforming the Very Small Aperture Terminal (“VSAT”) market. With end-markets for high-speed satellite-based networks significantly growing, our acquisition of UHP, if consummated, will allow us to enhance our solution offerings with low cost time division multiple access (“TDMA”) satellite modems which we do not currently offer. In June 2020, we agreed with UHP to amend the terms of our purchase agreement which resulted in the total aggregate purchase price being reduced by approximately 24% from $50.0 million to $38.0 million (of which $5.0 million will be paid in cash, with the remainder in shares of our common stock, cash, or a combination of both, as we may elect at the time of closing). The transaction is subject to customary closing conditions, including regulatory approval to allow us to purchase UHP's sister company which is headquartered in Moscow. In August 2020, at the request of the Federal Antimonopoly Service ("FAS") of the Russian Federation we submitted an application for regulatory approval to the FAS and the Commission for Supervising Foreign Investments in the Russian Federation (the "Russian Commission") pursuant to Russia’s Foreign Investment Law ("FIL"). In order to purchase UHP’s sister company, which is based in Moscow, approval by the Russian Commission and the FAS is required. If we do not receive approval by December 31, 2020, either we or UHP may terminate the purchase agreement. Acquisition Plan Expenses. During the three months ended October 31, 2020 and 2019, we incurred $91.2 million and $2.4 million, respectively, of acquisition plan expenses. For the more recent fiscal quarter, $88.3 million related to the previously announced litigation and merger termination with Gilat, including $70.0 million paid in cash to Gilat. The remaining costs primarily related to the pending acquisition of UHP and GD NG-911 acquisition-related litigation. Additionally, we recorded $1.2 million of incremental interest expense for ticking fees related to a now terminated financing commitment letter. COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED OCTOBER 31, 2020 AND 2019 Net Sales. Consolidated net sales were $135.2 million and $170.3 million for the three months ended October 31, 2020 and 2019, respectively, representing a decrease of $35.1 million, or 20.6%. The period-over-period decrease in net sales reflects lower net sales in both of our segments, as is further discussed below. Commercial Solutions Net sales in our Commercial Solutions segment were $81.8 million for the three months ended October 31, 2020, as compared to $94.3 million for the three months ended October 31, 2019, a decrease of $12.5 million, or 13.3%. Our Commercial Solutions segment represented 60.5% of consolidated net sales for the three months ended October 31, 2020 as compared to 55.4% for the three months ended October 31, 2019. Our book-to-bill ratio (a measure defined as bookings divided by net sales) for this segment was 0.81. Period-to-period fluctuations in bookings is normal for this segment. Net sales in the three months ended October 31, 2020 of our satellite ground station technologies were lower than the three months ended October 31, 2019. Although we have seen a recent spike of COVID-19 in many of the geographic markets where we sell our satellite ground station technologies, we continue to believe that the pandemic’s worst impact on our business is largely behind us. Although bookings of our satellite ground station technologies during the most recent quarter were below the comparable quarter of the prior year (which was not significantly impacted by COVID-19), bookings in the first quarter of fiscal 2021 were higher than the bookings achieved in each of our previous two quarters. 38 Index During the period, we were awarded a number of important orders including: (i) $1.7 million in orders from a large government entity in Asia, who selected our equipment to support a significant network upgrade, replacing a mix of vendors’ installed equipment; (ii) a $1.5 million order for Single Channel Per Carrier (“SCPC”) satellite modems from a tier-one defense contractor to upgrade and expand an existing network with our CDM-625A advanced satellite modems; (iii) $1.0 million in delivery orders from the U.S. Naval Information Warfare Systems Command for our latest generation SLM-5650B satellite modems and firmware upgrades; and (iv) a $1.0 million order for satellite ground station equipment from the largest telecommunications company in Africa, who specified our Heights™ Networking Platform and complementary block up converters to enhance and improve its mobile backhaul capabilities and to launch additional enterprise services. Net sales in the three months ended October 31, 2020 of our public safety and location technology solutions were lower than the three months ended October 31, 2019. As previously disclosed, we anticipated that AT&T would cease purchasing our 911 wireless call routing solutions as a result of our receipt of a large contract from another large U.S. mobile network operator. Our first quarter of fiscal 2021 reflected the absence of such sales to AT&T, offset, in part, by increased sales of our 5G virtual mobile location-based technology solutions. Also, during the most recent fiscal quarter, we have commenced work related to our recently awarded $54.0 million contract to design, deploy, and operate NG-911 services for the State of South Carolina. To-date, the business impact of COVID-19 on our public safety and location technology solutions has been relatively muted and long-term demand for our products appears strong. Although COVID-19 has resulted in the cancellation of several key public safety trade shows and some states and municipalities have announced budget constraints, we believe that other potential customers are increasing their funding for next-generation 911 ("NG-911") solutions, recognizing the critical importance of upgrading their 911 systems. In fact, our second quarter of fiscal 2021 has started off strong. As announced in November 2020, we were awarded a statewide contract valued at up to $175.1 million to design, deploy, and operate NG-911 services for the Commonwealth of Pennsylvania. The total contract value includes multi-year contract extension options. The Commonwealth of Pennsylvania initially funded the contract at $137.4 million, of which we booked $111.6 million during our second quarter of fiscal 2021. Based on our anticipated timing of performance, we expect meaningful revenue contribution from this contract to begin in fiscal 2022. During our first quarter of fiscal 2021, we also received a number of other important orders and offering enhancements relating to our public safety and location technology solutions, including: (i) a contract renewal for location and mapping technologies worth $4.2 million with a tier-one MNO; (ii) a contract award valued at up to $2.4 million to provide NG-911 services, including our Solacom Guardian Intelligent 911 Workstations, to the City of Edmonton’s police and fire rescue services; (iii) a five-year multi-million dollar upgrade contract to provide a tier-one MNO in Saudi Arabia with both active and passive location services supporting 2G, 3G and 4G networks; (iv) a contract renewal for location-based services (“LBS”) with Telefonica Digital, a Madrid-based research and development company which uses our global location services solution for its machine-to-machine communication requirements and customer use cases; and (v) contracts with Indian Motorcycle to expand coverage for the Ride Command feature in Europe, the Middle East and Africa, providing maps and Points of Interest (“POIs”) data, as well as support for Doppler Radar service for its customers in the U.S. and Canada. In aggregate, we remain optimistic that fiscal 2021 net sales for this segment will be slightly higher than the amount we achieved in fiscal 2020. Bookings, sales and profitability in our Commercial Solutions segment can fluctuate from period-to-period due to many factors, including changes in the general business environment. As such, period-to-period comparisons of our results may not be indicative of a trend or future performance. Government Solutions Net sales in our Government Solutions segment were $53.4 million for the three months ended October 31, 2020 as compared to $76.0 million for the three months ended October 31, 2019, a decrease of $22.6 million or 29.7%. Our Government Solutions segment represented 39.5% of consolidated net sales for the three months ended October 31, 2020 as compared to 44.6% for the three months ended October 31, 2019. Our book-to-bill ratio (a measure defined as bookings divided by net sales) in this segment for our first quarter of fiscal 2021 was 1.07. Period-to-period fluctuations in bookings is normal for this segment. Net sales of our mission-critical technologies during the three months ended October 31, 2020 were lower as compared to the three months ended October 31, 2019, primarily due to the timing of and performance on orders related to our Global Tactical Advanced Communication Systems ("GTACS") contract and high reliability Electrical, Electronic and Electromechanical (“EEE”) satellite based space components. During our most recent quarter, we generated a nominal amount of sales from our January 2020 acquisition of CGC Technology Limited ("CGC"). 39 Index Receipt of new orders for our mission-critical technologies during the first quarter fiscal 2021 include: (i) $5.9 million of additional funding on our previously announced contract to provide the U.S. Army with global field support services for military satellite communication (“SATCOM”) terminals around the world; (ii) $5.4 million of additional orders from the U.S. government for our Joint Cyber Analysis Course (“JCAC”) training solutions; (iii) $3.0 million of additional funding for a 12-month extension on an existing contract to provide the State of Maryland’s Department of Human Services with statewide information technology (“IT”) services; (iv) $2.7 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"); (v) $2.6 million of orders to supply Manpack Satellite Terminals, networking equipment and other advanced VSAT products to the U.S. Army; and (vi) $1.9 million of additional funding to continue to provide critical IT staffing and support to multiple agencies within the City of Baltimore, including the Baltimore City of Information Technology and Baltimore City Police Department. Net sales of our high-performance transmission technologies during the three months ended October 31, 2020 were lower as compared to the three months ended October 31, 2019. During the first quarter of fiscal 2021, we continued to make progress to ship initial orders on our 10-year, $211.0 million IDIQ contract awarded to us by a prime contractor to provide next generation troposcatter systems in support of the U.S. Marine Corps. We believe this multi-year opportunity validates Comtech’s market leading troposcatter technologies and expertise and we continue to see strong interest from both the U.S. military and foreign governments for our recently introduced Comtech COMET terminals. We believe COVID-19 has resulted in some of our international customers delaying potential order awards and we are seeing fielding and order delays from U.S. military customers. In addition, in early December 2020, we temporarily closed our antenna production facility in the United Kingdom due to a spike in COVID-19 cases in that area and we have informed impacted customers that certain orders previously expected to ship will be delayed. Nevertheless, we believe these issues are temporary and long-term demand for our Government Solutions products and technologies remains strong. As such, looking forward, and despite the lingering impact of COVID-19, we believe fiscal 2021 net sales for this segment will be similar to or slightly higher than the amount we achieved in fiscal 2020. 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 Sales by geography and customer type, as a percentage of related sales, for the three months ended October 31, 2020 and 2019 are as follows: Three months ended October 31, 2020 2019 2020 2019 2020 2019 Commercial Solutions Government Solutions Consolidated U.S. government 11.6 % 17.7 % 64.4 % 69.5 % 32.5 % 40.8 % Domestic 60.2 % 56.6 % 13.9 % 10.6 % 41.9 % 36.1 % Total U.S. 71.8 % 74.3 % 78.3 % 80.1 % 74.4 % 76.9 % International 28.2 % 25.7 % 21.7 % 19.9 % 25.6 % 23.1 % Total 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % Sales to U.S. government customers include sales to the U.S. Department of Defense ("DoD"), intelligence and civilian agencies, as well as sales directly to or through prime contractors. Domestic sales include sales to commercial customers, as well as to U.S. state and local governments. Included in domestic sales are sales to Verizon Communications Inc. ("Verizon"), which accounted for 12.5% of consolidated net sales for the three months ended October 31, 2020. Except for the U.S. government, there were no customers that represented more than 10.0% of consolidated net sales during the three months ended October 31, 2019. International sales for the three months ended October 31, 2020 and 2019 (which include sales to U.S. domestic companies for inclusion in products that are sold to international customers) were $34.6 million and $39.4 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% of consolidated net sales for three months ended October 31, 2020 and 2019. 40 Index Gross Profit. Gross profit was $50.2 million and $63.6 million for three months ended October 31, 2020 and 2019, respectively. The decrease of $13.4 million primarily reflects the decrease in consolidated net sales, as discussed above. Gross profit, as a percentage of consolidated net sales, for the three months ended October 31, 2020 was 37.1% as compared to 37.3% for the three months ended October 31, 2019. Our gross profit during the first quarter of fiscal 2021 also reflects minor increases in costs due to order delays, production delays, minor supply chain disruptions, lower levels of factory utilization and higher logistics and operational costs resulting from the COVID-19 pandemic. 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 October 31, 2020 decreased in comparison to the three months ended October 31, 2019. The decrease in gross profit percentage in the three months ended October 31, 2020 primarily reflects changes in products and services mix, including the cessation of sales to AT&T for 911 wireless call routing and lower net sales of our satellite ground station technologies. Our Government Solutions segment's gross profit, as a percentage of related segment net sales, for the three months ended October 31, 2020 increased in comparison to the three months ended October 31, 2019. The increase in gross profit percentage primarily reflects an overall more favorable product mix. Gross margins in this segment were impacted by production delays in our antenna manufacturing facility located in the United Kingdom, primarily due to a spike in COVID-19. Included in consolidated cost of sales for the three months ended October 31, 2020 and 2019 are provisions for excess and obsolete inventory of $1.0 million and $0.4 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 trends. 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 segment, and therefore is inherently difficult to forecast. Selling, General and Administrative Expenses . Selling, general and administrative expenses were $27.5 million and $31.9 million for the three months ended October 31, 2020 and 2019, respectively, representing a decrease of $4.4 million, or 13.8%. As a percentage of consolidated net sales, selling, general and administrative expenses were 20.3% and 18.7% for the three months ended October 31, 2020 and 2019, respectively. The increase, as a percentage of consolidated net sales, is primarily attributable to lower consolidated net sales. Our selling, general and administrative expenses for the three months ended October 31, 2020 reflect the benefit from certain cost saving measures taken in fiscal 2020, and that are still in place, in response to the negative business impacts of COVID-19. In addition to the elimination of certain discretionary expenses, we continue to conduct most of our non-production related operations through remote working arrangements, curtailed most business travel, and have established social distancing safeguards. These precautions and business practices will remain in effect as long as government advisories recommend. Although we have incurred lower travel expenses in the first quarter of fiscal 2021 than we did in the first quarter of fiscal 2020, there has been a corresponding increase in information technology cost and COVID-19 safety related expenses. During the three months ended October 31, 2019, we incurred estimated contract settlement costs of $0.2 million related to the repositioning of our public safety and location technologies solutions offerings in our Commercial Solutions segment. Amortization of stock-based compensation expenses recorded as selling, general and administrative expenses was $0.5 million in the three months ended October 31, 2020 as compared to $0.7 million in the three months ended October 31, 2019. Amortization of stock-based compensation is not allocated to our two reportable operating segments. Research and Development Expenses. Research and development expenses were $11.6 million and $14.9 million for the three months ended October 31, 2020 and 2019, respectively, representing a decrease of $3.3 million, or 22.1%. As a percentage of consolidated net sales, research and development expenses were 8.6% and 8.7% for the three months ended October 31, 2020 and 2019, respectively. For the three months ended October 31, 2020 and 2019, research and development expenses of $9.4 million and $12.9 million, respectively, related to our Commercial Solutions segment, and $2.1 million and $1.9 million, respectively, related to our Government Solutions segment. The remaining research and development expenses of $0.1 million in both the three months ended October 31, 2020 and 2019 related to the amortization of stock-based compensation expense. 41 Index Whenever possible, we seek customer funding for research and development to adapt our products to specialized customer requirements. During three months ended October 31, 2020 and 2019, customers reimbursed us $3.4 million and $2.7 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 $5.6 million (of which $4.3 million was for the Commercial Solutions segment and $1.3 million was for the Government Solutions segment) for the three months ended October 31, 2020 and $5.2 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 October 31, 2019. The increase of $0.4 million was primarily due to our completed fiscal 2020 acquisitions. Acquisition Plan Expenses. During the three months ended October 31, 2020 and 2019, we incurred $91.2 million and $2.4 million, respectively, of acquisition plan expenses. For the more recent fiscal quarter, $88.3 million related to the previously announced litigation and merger termination with Gilat, including $70.0 million paid in cash to Gilat. The remaining costs primarily related to the pending acquisition of UHP and GD NG-911 acquisition-related litigation. These expenses are primarily recorded in our Unallocated segment. During the second quarter of fiscal 2021, we expect to incur approximately $3.5 million of acquisition plan expenses. Once the pending UHP acquisition and GD NG-911 acquisition-related litigation matters are completed, we expect acquisition plan expenses to decline significantly. Operating (Loss) Income. Operating loss for the three months ended October 31, 2020 was $85.7 million as compared the operating income of $9.3 million for three months ended October 31, 2019. Operating income (loss) by reportable segment is shown in the table below: Three months ended October 31, 2020 2019 2020 2019 2020 2019 2020 2019 ($ in millions) Commercial Solutions Government Solutions Unallocated Consolidated Operating income (loss) $ 8.8 9.8 2.6 7.1 (97.1) (7.7) $ (85.7) 9.3 Percentage of related net sales 10.8 % 10.4 % 4.9 % 9.3 % NA NA NA 5.5 % The decrease in our Commercial Solutions segment operating income, in dollars, for the three months ended October 31, 2020 was driven primarily by lower net sales and a lower gross profit percentage, offset in part by lower research and development expenses and amortization of intangibles, as discussed above. The decrease in our Government Solutions segment operating income for the three months ended October 31, 2020, both in dollars and as a percentage of related segment net sales, was driven primarily by lower net sales and an increase in both research and development expenses and amortization of intangibles, offset in part by an increase in this segment’s gross profit percentage, as discussed above. The increase in unallocated expenses for the three months ended October 31, 2020 as compared to the three months ended October 31, 2019 is primarily due to litigation settlement costs, as discussed above. Amortization of stock-based compensation was $0.7 million and $0.9 million, respectively, for the three months ended October 31, 2020 and 2019. Excluding the $91.2 million of acquisition plan expenses, consolidated operating income for the three months ended October 31, 2020 would have been $5.5 million, or 4.0% of consolidated net sales. Excluding $0.2 million of estimated contract settlement costs and $2.4 million of acquisition plan expenses, consolidated operating income for three months ended October 31, 2019 would have been $11.9 million, or 7.0% of consolidated net sales. The decrease, both in dollars and as a percentage of consolidated net sales, was due primarily to lower consolidated net sales, as discussed above. Unallocated expenses in fiscal 2021 will be impacted by ongoing acquisition plan expenses, as discussed above. 42 Index Interest Expense and Other. Interest expense was $2.3 million and $1.8 million for three months ended October 31, 2020 and 2019, respectively. Interest expense during the most recent fiscal quarter includes $1.2 million of incremental interest expense for ticking fees related to a now terminated financing commitment letter. Excluding the $1.2 million, our effective interest rate (including amortization of deferred financing costs) in three months ended October 31, 2020 was approximately 2.7%. Our current cash borrowing rate (which excludes the amortization of deferred financing costs) under our existing Credit Facility approximates 1.9%. Interest (Income) and Other. Interest (income) and other for both the three months ended October 31, 2020 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. (Benefit from) Provision for Income Taxes. Our income tax provision or benefit is computed by applying an estimated annual effective tax rate for the full fiscal year to “ordinary” income or loss for the reporting period (“ordinary” is generally defined as pre-tax income or loss excluding unusual or infrequently occurring discrete tax items). For the three months ended October 31, 2020, we recorded a tax benefit of $2.2 million as compared to a tax provision of $1.1 million for the three months ended October 31, 2019. Our effective tax rate (excluding discrete tax items) for the three months ended October 31, 2020 and October 31, 2019 was 13.75% and 23.0%, respectively. The decrease from 23.0% to 13.75% is primarily due to expected product and geographical mix changes reflected in our Business Outlook for Fiscal 2021. For purposes of determining our 13.75% estimated annual effective tax rate for fiscal 2021, the $70.0 million of acquisition plan expense paid to Gilat, as discussed above, was considered an unusual and infrequently occurring discrete tax item and excluded from the computation of our effective tax rate. No financial statement benefit was recorded for the $70.0 million portion of acquisition plan expenses. Our tax benefit for the three months ended October 31, 2020 was partially offset by a net discrete tax expense of $0.2 million, primarily related to the stock-based awards that were settled during the quarter. During the three months ended October 31, 2019, we recorded a net discrete tax benefit of $0.6 million, primarily related to stock-based awards that were settled during the quarter. Our federal income tax returns for fiscal 2017 through 2019 are subject to potential future IRS audit. None of our state income tax returns prior to fiscal 2016 are subject to audit. Future tax assessments or settlements could have a material adverse effect on our consolidated results of operations and financial condition. Net (Loss) Income. During the three months ended October 31, 2020, consolidated net loss was $85.8 million as compared to a net income of $6.4 million during the three months ended October 31, 2019. 43 Index Adjusted EBITDA. Adjusted EBITDA (both in dollars and as a percentage of related net sales) for both the three months ended October 31, 2020 and 2019 are shown in the table below (numbers in the table may not foot due to rounding): Three months ended October 31, 2020 2019 2020 2019 2020 2019 2020 2019 ($ in millions) Commercial Solutions Government Solutions Unallocated Consolidated Net income (loss) $ 8.3 9.9 2.7 7.1 (96.8) (10.6) $ (85.8) 6.4 Provision for (benefit from) income taxes 0.3 — (0.1) — (2.5) 1.1 (2.2) 1.1 Interest (income) and other 0.1 (0.1) — — — — 0.1 (0.1) Interest expense — — 0.1 — 2.2 1.8 2.3 1.8 Amortization of stock-based compensation — — — — 0.7 0.9 0.7 0.9 Amortization of intangibles 4.3 4.4 1.3 0.8 — — 5.6 5.2 Depreciation 2.0 2.2 0.4 0.3 0.2 0.1 2.6 2.7 Estimated contract settlement costs — 0.2 — — — — — 0.2 Acquisition plan expenses (1.1) — — — 92.2 2.4 91.2 2.4 Adjusted EBITDA $ 14.0 16.6 4.3 8.2 (4.0) (4.3) $ 14.3 20.6 Percentage of related net sales 17.1 % 17.6 % 8.1 % 10.8 % NA NA 10.6 % 12.1 % The decrease in consolidated Adjusted EBITDA, both in dollars and as a percentage of consolidated net sales, for the three months ended October 31, 2020 as compared to the three months ended October 31, 2019 is primarily attributable to lower consolidated net sales, 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, is primarily due to lower net sales, as discussed above. The decrease in our Government Solutions segment's adjusted EBITDA, both in dollars and as a percentage of related segment net sales, is primarily due to lower net sales, as discussed above. Because our consolidated Adjusted EBITDA, as a percentage of consolidated net sales, depends on the volume of sales, sales mix and related gross profit for each individual segment as well as unallocated spending, it is inherently difficult to forecast. A reconciliation of our fiscal 2020 GAAP Net Income to Adjusted EBITDA is shown in the table below (numbers in the table may not foot due to rounding): ($ in millions) Fiscal Year 2020 Reconciliation of GAAP Net Income to Adjusted EBITDA: Net income $ 7.0 Provision for income taxes 2.3 Interest (income) and other (0.2) Interest expense 6.1 Amortization of stock-based compensation 9.3 Amortization of intangibles 21.6 Depreciation 10.6 Estimated contract settlement costs 0.4 Acquisition plan expenses 20.8 Adjusted EBITDA $ 77.8 44 Index Reconciliations of our GAAP consolidated operating income (loss), net income (loss) and net income (loss) per diluted share for the three months ended October 31, 2020 and 2019 to the corresponding non-GAAP measures are shown in the tables below (numbers and per share amounts in the table may not foot due to rounding). In addition, non-GAAP income per diluted share adjustments for the three months ended October 31, 2020 were computed using 25,315,000 weighted average diluted shares outstanding during the respective period: Three months ended October 31, 2020 ($ in millions, except for per share amount) Operating (Loss) Income Net (Loss) Income Net (Loss) Income per Diluted Share Reconciliation of GAAP to Non-GAAP Earnings: GAAP measures, as reported $ (85.7) $ (85.8) $ (3.39) Acquisition plan expenses 91.2 88.3 3.49 Interest expense — 1.0 0.04 Net discrete tax expense — 0.2 0.01 Non-GAAP measures $ 5.5 $ 3.7 $ 0.15 Three months ended October 31, 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 $ 9.3 $ 6.4 $ 0.26 Acquisition plan expenses 2.4 1.8 0.07 Estimated contract settlement costs 0.2 0.2 0.01 Net discrete tax benefit — (0.6) (0.02) Non-GAAP measures $ 11.9 $ 7.8 $ 0.32 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 intangibles, depreciation expense, estimated contract settlement costs, settlement of intellectual property litigation, acquisition plan expenses, facility exit costs and strategic alternatives analysis expenses and other. Our definition of Adjusted EBITDA may differ from the definition of EBITDA or Adjusted EBITDA used by other companies and therefore may not be comparable to similarly titled measures used by other companies. Adjusted EBITDA is also a measure frequently requested by our investors and analysts. We believe that investors and analysts may use Adjusted EBITDA, along with other information contained in our SEC filings, 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. 45 Index LIQUIDITY AND CAPITAL RESOURCES Our cash and cash equivalents decreased $15.4 million from $47.9 million at July 31, 2020 to $32.5 million at October 31, 2020. The decrease in cash and cash equivalents during the three months ended October 31, 2020 was driven by the following: • Net cash used in operating activities was $74.2 million for the three months ended October 31, 2020 as compared to net cash provided by operating activities of $5.4 million for the three months ended October 31, 2019. Because we did not complete the Gilat acquisition, we presented the $70.0 million payment to Gilat made during the three months ended October 31, 2020 as a reduction to cash flows from operating activities for the current period rather than as a cash outflow stemming from investing activities. Additionally, the period-over-period decrease in cash flow from operating activities reflects lower net sales and overall changes in net working capital requirements, principally the timing of shipments, billings and payments. Excluding the $70.0 million payment to Gilat, net cash used in operating activities would have been $4.2 million. We expect to generate a significant amount of positive operating cash flows during the remainder of fiscal 2021. • Net cash used in investing activities for the three months ended October 31, 2020 and 2019 was $0.9 million and $1.3 million, respectively. Net cash used in both periods relates to expenditures for property, plant and equipment upgrades and enhancements. • Net cash provided by financing activities was $59.7 million for the three months ended October 31, 2020 as compared to net cash used in financing activities of $2.9 million for the three months ended October 31, 2019. During the three months ended October 31, 2020, we had net borrowings under our Credit Facility of $67.5 million, primarily due to the $70.0 million payment we made to Gilat. During the three months ended October 31, 2020 and 2019, we paid $5.2 million and $2.7 million, respectively, in cash dividends to our stockholders. We also made $2.7 million and $4.6 million of payments to remit employees' statutory tax withholding requirements related to the net settlement of stock-based awards during the three months ended October 31, 2020 and 2019, respectively. The Credit Facility is discussed below and in " Notes to Condensed Consolidated Financial Statements - Note (10) - 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. As of October 31, 2020, our material short-term cash requirements primarily consist of: (i) interest payments under our Credit Facility; (ii) payments related to lease commitments; (iii) our ongoing working capital needs, including income tax payments; and (iv) payment of accrued quarterly dividends. We also have other short-term cash requirements related to our pending acquisition of UHP, as discussed in Part 1 Item. 1. - " Notes to Condensed Consolidated Financial Statements - Note (2) - Acquisitions. " In December 2018, we filed a $400.0 million shelf registration statement with the SEC for the sale of various types of securities, including debt. The shelf registration statement was declared effective by the SEC as of December 14, 2018. On September 29, 2020, our Board of Directors authorized a new $100.0 million stock repurchase program, which replaced our prior program. The new $100.0 million stock repurchase program has no time restrictions and repurchases may be made from time to time in open-market or privately negotiated transactions, or by other means in accordance with federal securities laws. There were no repurchases of our common stock during three months ended October 31, 2020 and 2019. On September 29, 2020, our Board of Directors declared a dividend of $0.10 per common share, which was paid on October 27, 2020. On December 9, 2020, our Board of Directors declared a dividend of $0.10 per common share, payable on February 19, 2021 to stockholders of record at the close of business on January 20, 2021. Future dividends remain subject to compliance with financial covenants under our Credit Facility, as well as Board approval. 46 Index Our material long-term cash requirements primarily consist of mandatory interest payments pursuant to our Credit Facility and 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 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 On October 31, 2018, we entered into a First Amended and Restated Credit Agreement (the "Credit Facility") with a syndicate of lenders. The 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. As of October 31, 2020, the amount outstanding under our Credit Facility was $217.0 million, which is reflected in the non-current portion of long-term debt on our Condensed Consolidated Balance Sheet. At October 31, 2020, we had $3.0 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. During three months ended October 31, 2020, we had outstanding balances under the Credit Facility ranging from $125.0 million to $217.0 million. Borrowings under the Credit Facility shall be either: (i) Alternate Base Rate borrowings, which bear interest from the applicable borrowing date at a rate per annum equal to (x) the greatest of (a) the Prime Rate (as defined) in effect on such day, (b) the Federal Funds Effective Rate (as defined) in effect on such day plus 1/2 of 1.00% per annum and (c) the Adjusted LIBO Rate (as defined) on such day (or, if such day is not a business day, the immediately preceding business day) plus 1.00% per annum, plus (y) the Applicable Rate (as defined), or (ii) Eurodollar borrowings, which bear interest from the applicable borrowing date at a rate per annum equal to (x) the Adjusted LIBO Rate for such interest period plus (y) the Applicable Rate. Determination of the Applicable Rate is based on a pricing grid that is dependent upon our Secured Leverage Ratio (as defined) as of the end of each fiscal quarter for which consolidated financial statements have been most recently delivered. The Credit Facility contains customary representations, warranties and affirmative covenants. The Credit Facility also contains customary negative covenants, subject to negotiated exceptions, including but not limited to: (i) liens, (ii) investments, (iii) indebtedness, (iv) significant corporate changes, including mergers and acquisitions, (v) dispositions, (vi) restricted payments, including stockholder dividends, and (vii) certain other restrictive agreements. The Credit Facility also contains certain financial covenants and customary events of default (subject to grace periods, as appropriate), such as payment defaults, cross-defaults to other material indebtedness, bankruptcy and insolvency, the occurrence of a defined change in control and the failure to observe the negative covenants and other covenants related to the operation of our business. In addition, under certain circumstances, we may be required to enter into amendments to the Credit Facility in connection with any further syndication of the Credit Facility. The Credit Facility provides for, among other things: (i) no scheduled payments of principal until maturity; (ii) a maximum Secured Leverage Ratio of 3.75x trailing twelve months ("TTM") Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA") and a Maximum Total Leverage Ratio of 4.50x TTM Adjusted EBITDA, each with no step downs; and (iii) a Minimum Interest Expense Coverage Ratio of 3.25x TTM Adjusted EBITDA. 47 Index As of October 31, 2020, our Secured Leverage Ratio was 3.31x TTM Adjusted EBITDA compared to the maximum allowable Secured Leverage Ratio of 3.75x TTM Adjusted EBITDA. Our Interest Expense Coverage Ratio as of October 31, 2020 was 11.42x TTM Adjusted EBITDA compared to the Minimum Interest Expense Coverage Ratio of 3.25x TTM Adjusted EBITDA. The obligations under the Credit Facility are guaranteed by certain of our domestic subsidiaries (the "Guarantors"). As collateral security under the Credit Facility and the guarantees thereof, we and the Guarantors have granted to the administrative agent, for the benefit of the lenders, a lien on, and first priority security interest in, substantially all of our tangible and intangible assets. On December 6, 2018, we entered into the first amendment to the Credit Facility. The purpose of the amendment is to provide for a mechanism to replace the LIBO Rate for Eurodollar borrowings with an alternative benchmark interest rate, should the LIBO Rate generally become unavailable in the future on an other-than-temporary basis. Capitalized terms used but not defined herein have the meanings set forth for such terms in the Credit Facility and the Prior Credit Facility, which have been documented and filed with the SEC. Off-Balance Sheet Arrangements As of October 31, 2020, 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 October 31, 2020, will materially adversely affect our liquidity. At October 31, 2020, cash payments due under long-term obligations (including estimated interest expense on our Credit Facility), 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 2021 2022 and 2023 2024 and 2025 After 2025 Credit Facility - principal payments $ 217,000 — — 217,000 — Credit Facility - interest payments 14,154 3,551 9,436 1,167 — Operating and finance lease obligations 33,450 6,938 14,404 9,301 2,807 Contractual cash obligations $ 264,604 10,489 23,840 227,468 2,807 As discussed further in " Notes to Condensed Consolidated Financial Statements - Note (10) - Credit Facility ," our 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 (11) - Leases ," in September 2020, we signed a 15-year lease commencing in December 2020 for a facility in Chandler, Arizona to support our anticipated growth and long-term business goals for our satellite earth station product line. We anticipate that all of our existing Tempe, Arizona operations will be fully relocated to this facility in the second half of our fiscal 2021. Such amounts are not included in the above table, as the related commitment has not commenced as of October 31, 2020. As discussed further in " Notes to Condensed Consolidated Financial Statements - Note (17) - Stockholders’ Equity ," on December 9, 2020, our Board of Directors declared a dividend of $0.10 per common share, payable on February 19, 2021 to stockholders of record at the close of business on January 20, 2021. Future dividends remain subject to compliance with financial covenants under our Credit Facility, as well as Board approval. At October 31, 2020, we have approximately $3.0 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. 48 Index As discussed in " Notes to Condensed Consolidated Financial Statements - Note (2) - Acquisitions ," we have a potential short-term cash commitments of $5.0 million to fund the acquisition of UHP. This cash commitment and related transaction expenses are not included in the above 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 (18) - Legal Proceedings and Other Matters ," we are 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. 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 at October 31, 2020 includes total liabilities of $8.5 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 three months ended October 31, 2020, we adopted: • FASB ASU No. 2016-13, which requires companies to utilize an impairment model (current expected credit loss ("CECL")) for most financial assets measured at amortized cost and certain other financial instruments, which include, but are not limited to trade receivables and contract assets. This accounting standard replaced the incurred loss model with a model that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to estimate those losses. On August 1, 2020, we adopted this ASU on a modified-retrospective basis and recorded a $0.2 million decrease to opening retained earnings. • FASB ASU No. 2018-13, which modifies the disclosure requirements for fair value measurements in Topic 820. On August 1, 2020, we adopted this ASU. Our adoption of this ASU did not have any impact on our condensed consolidated financial statements or disclosures. • FASB ASU No. 2018-15, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this ASU. On August 1, 2020, we adopted this ASU. Our adoption of this ASU did not have any impact on our condensed consolidated financial statements or disclosures. • FASB ASU No. 2018-17, which requires entities to consider indirect interests held through related parties under common control on a proportional basis, rather than as the equivalent of a direct interest in its entirety, when determining whether a decision-making fee is a variable interest. On August 1, 2020, we adopted this ASU. Our adoption of this ASU did not have any impact on our condensed consolidated financial statements or disclosures. 49 Index • FASB ASU No. 2018-18, which clarifies when certain transactions between collaborative arrangement participants should be accounted for under ASC 606 and incorporates unit-of-account guidance consistent with ASC 606 to aid in this determination. The ASU also precludes entities from presenting consideration from transactions with a collaborator that is not a customer together with revenue recognized from contracts with customers. On August 1, 2020, we adopted this ASU. Our adoption of this ASU did not have any impact on our condensed consolidated financial statements or disclosures. • FASB ASU No. 2019-08, which requires that an entity measure and classify share-based payment awards granted to a customer by applying the guidance in Topic 718. The amount recorded as a reduction of the transaction price is required to be measured on the basis of the grant-date fair value of the share-based payment award. On August 1, 2020, we adopted this ASU. Our adoption of this ASU did not have any impact on our condensed consolidated financial statements or disclosures. 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 October 31, 2020: • FASB ASU No. 2019-12, issued in December 2019 is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This ASU is effective for fiscal years beginning after December 15, 2020 (our fiscal year beginning on August 1, 2021) and interim periods therein, with early adoption permitted. We are evaluating the impact of this ASU on our condensed consolidated financial statements and disclosures. • FASB ASU No. 2020-01, issued in January 2020, clarifies the interactions between Topics 321, 323 and 815. This ASU clarifies that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. In addition, the amendments clarify the accounting for certain forward contracts and purchased options accounted for under Topic 815. This ASU is effective for fiscal years beginning after December 15, 2020 (our fiscal year beginning on August 1, 2021) and interim periods therein. 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 have not historically had equity method investments or purchased options and forward contracts to acquire investments.