COMTECH TELECOMMUNICATIONS CORP DE

Net Sales. Consolidated net sales were $540.4 million and $550.0 million for fiscal 2024 and 2023, respectively, representing a decrease of $9.6 million, or 1.7%. The decrease reflects lower net sales in our Satellite and Space Communications segment offset, in part, by an increase in net sales in our Terrestrial and Wireless Networks segment, as further discussed below. The prior year included a full year of operations related to our solid state, high power amplifier product line divested in November 2023 (the "PST Divestiture"). Adjusted for the PST Divestiture and despite very challenging business conditions in fiscal 2024, our consolidated net sales grew slightly from fiscal 2023.

Satellite and Space Communications

Net sales in our Satellite and Space Communications segment were $324.1 million for fiscal 2024 as compared to $337.8 million for fiscal 2023, a decrease of $13.7 million, or 4.1%. Fiscal 2024 primarily reflects significantly higher net sales of our troposcatter and SATCOM solutions to U.S. government customers (including progress toward delivering next-generation troposcatter terminals to the U.S. Marine Corps and U.S. Army), offset by lower net sales of satellite ground infrastructure solutions (including X/Y steerable antennas), high power solid state amplifiers related to the PST Divestiture in November 2023 and COMET troposcatter terminals to international customers. Our Satellite and Space Communications segment represented 60.0% of consolidated net sales for fiscal 2024 as compared to 61.4% for fiscal 2023. Our book-to-bill ratio (a measure defined as bookings divided by net sales) in this segment for fiscal 2024 was 1.03x.

Bookings, sales and profitability in our Satellite and Space Communications 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, and 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. Also, during the fourth quarter of fiscal 2024, as part of our recently announced transformation strategy, we made the decision to cease operations located in the United Kingdom related to our X/Y steerable antenna product line. As a result, we do not anticipate generating any meaningful sales from this product line in fiscal 2025 and beyond.

Terrestrial and Wireless Networks

Net sales in our Terrestrial and Wireless Networks segment were $216.3 million for fiscal 2024, as compared to $212.2 million for fiscal 2023, an increase of $4.1 million, or 1.9%, reflecting higher net sales of our NG-911 and call handling services, offset in part by lower net sales of our location based solutions. Our Terrestrial and Wireless Networks segment represented 40.0% of consolidated net sales for fiscal 2024 as compared to 38.6% for fiscal 2023. Our book-to-bill ratio (a measure defined as bookings divided by net sales) in this segment for fiscal 2024 was 1.70x.

Bookings, sales and profitability in our Terrestrial and Wireless Networks segment can fluctuate from period-to-period due to many factors, including changes in the general business environment. Period-to-period fluctuations in bookings are normal for this segment. As such, period-to-period comparisons of our results may not be indicative of a trend or future performance. Also, on October 17, 2024, we announced that we are exploring strategic alternatives for our Terrestrial and Wireless Networks segment, which is in advanced stages. Accordingly, future results of operations can be impacted by the timing and outcome of such initiatives. There can be no assurance that the exploration of strategic alternatives will result in a transaction or other strategic changes or outcomes.

Geography and Customer Type

Sales by geography and customer type, as a percentage of related sales, for the fiscal years ended July 31, 2024 and 2023 are as follows:

Sales to U.S. government customers include sales to the U.S. 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. For fiscal 2024, except for the U.S. government, there were no customers that represented more than 10% of consolidated net sales. For fiscal 2023, included in domestic sales are sales to Verizon Communications Inc. ("Verizon"), which were 10.6% of consolidated net sales.

International sales for fiscal 2024 and 2023 (which include sales to U.S. domestic companies for inclusion in products that are sold to international customers) were $115.9 million and $132.1 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 fiscal 2024 and 2023.

Gross Profit. Gross profit was $157.2 million and $184.5 million for fiscal 2024 and 2023, respectively. Gross profit, as a percentage of consolidated net sales, for fiscal 2024 was 29.1% as compared to 33.5% for fiscal 2023. Our gross profit (both in dollars and as a percentage of consolidated net sales) reflects overall product mix changes (including the impact of the PST Divestiture, as discussed above. In addition, during fiscal 2023, we recorded a benefit of $2.3 million to cost of sales as we reduced a warranty accrual due to lower than expected warranty claims in our NG-911 product line. Gross profit, as a percentage of related segment net sales, is further discussed below.

Our Satellite and Space Communications segment's gross profit, as a percentage of related segment net sales, for fiscal 2024 decreased in comparison to fiscal 2023. The gross profit percentage in the more recent period reflects changes in products and services mix, as discussed above, and higher expected costs at completion as we advanced certain nonrecurring engineering related projects in our satellite ground infrastructure product line through development and toward production. Also, fiscal 2024 gross profit in this segment reflects challenging business conditions related to our steerable antenna operations located in the United Kingdom that we recently announced exiting.

Our Terrestrial and Wireless Networks segment's gross profit, as a percentage of related segment net sales, for fiscal 2024 decreased in comparison to fiscal 2023. The gross profit percentage in the more recent period reflects changes in products and services mix, as discussed above.

Included in consolidated cost of sales are provisions for excess and obsolete inventory of $2.8 million and $4.9 million, for fiscal 2024 and 2023, respectively. As discussed in"Item 7. 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. On October 17, 2024, we announced that we are executing a strategy to transform Comtech into a pure-play satellite and space communications company. Ongoing and future actions supporting the transformation strategy include the pursuit of further portfolio-shaping opportunities to enhance profitability, efficiency and focus and the implementation of additional organizational, operational and cost-savings initiatives to both achieve profitable results from operations as well as to align our go-forward cost structure with a pure-play focus on satellite and space communications. While anticipated to improve our profitability in future periods, such actions may result in near term restructuring charges, including an increase in our provision for excess and obsolete inventory.

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. Our consolidated gross profit, as a percentage of consolidated net sales may also be impacted by the timing and outcome of actions we may take related to our transformation strategy initiatives.

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $123.2 million and $120.0 million for fiscal 2024 and 2023, respectively. As a percentage of consolidated net sales, selling, general and administrative expenses were 22.8% and 21.8% for fiscal 2024 and 2023, respectively.

During fiscal 2024 and 2023, we incurred $12.5 million and $10.9 million, respectively, of restructuring costs primarily related to streamlining our operations and improving efficiency, including severance and costs associated with the relocation of certain of our satellite ground infrastructure production facilities to our 146,000 square foot facility in Chandler, Arizona. Fiscal 2024 costs also include those activities supporting the PST Divestiture in November 2023 and, more recently, our announced pursuit of strategic alternatives related to our Terrestrial and Wireless Networks segment. Excluding restructuring costs, selling, general and administrative expenses for fiscal 2024 and 2023 would have been $110.9 million or 20.5% and $109.2 million or 19.9%, respectively, of consolidated net sales.

Amortization of stock-based compensation expense recorded as selling, general and administrative expenses was $4.8 million in fiscal 2024 as compared to $8.0 million in fiscal 2023. Although higher in the prior fiscal 2023 period, both fiscal 2024 and 2023 include fully vested stock-based awards granted to certain employees in lieu of annual non-equity incentive compensation. Also, the more recent period reflects a benefit associated with the forfeitures of stock-based awards related to our former CEO. Amortization of stock-based compensation is not allocated to our two reportable operating segments.

Research and Development Expenses. Research and development expenses were $24.1 million and $48.6 million for fiscal 2024 and 2023, respectively, representing a decrease of $24.5 million, or 50.4%. As a percentage of consolidated net sales, research and development expenses were 4.5% and 8.8% for fiscal 2024 and 2023, respectively.

For fiscal 2024 and 2023, research and development expenses of $12.9 million and $22.4 million, respectively, related to our Satellite and Space Communications segment, and $10.6 million and $25.2 million, respectively, related to our Terrestrial and Wireless Networks segment. The remaining research and development expenses of $0.5 million and $1.0 million in fiscal 2024 and 2023, respectively, related to the amortization of stock-based compensation expense.

During fiscal 2024 and 2023, we incurred $4.1 million and $3.8 million, respectively, of strategic emerging technology costs in our Satellite and Space Communications segment for next-generation satellite technology to advance our solutions offerings to be used with new broadband satellite constellations. We expect strategic emerging technology costs to decrease in fiscal 2025 as a result of our fourth quarter fiscal 2024 decision to cease operations related to our steerable antenna product line in the United Kingdom.

Whenever possible, we seek customer funding for research and development to adapt our products to specialized customer requirements. During fiscal 2024 and 2023, customers reimbursed us $18.9 million and $14.0 million, respectively, which is not reflected in the reported research and development expenses but is included in net sales with the related costs included in cost of sales.

In addition to the recent increases in customer-funded research and development activities, in fiscal 2024, we also experienced an increase in engineering efforts related to cost to fulfill contract assets and internal use software, for which we capitalized $2.9 million and $3.8 million, respectively. As a result of these trends, a more focused prioritization of resources across various programs and the impact of prior reductions in force announced in fiscal 2023, our research and development expenses for financial reporting purposes significantly decreased in fiscal 2024 as compared to historical periods.

Amortization of Intangibles. Amortization relating to intangible assets with finite lives was $21.2 million for fiscal 2024 (of which $6.7 million was for the Satellite and Space Communications segment and $14.5 million was for the Terrestrial and Wireless Networks segment) and $21.4 million for fiscal 2023 (of which $7.3 million was for the Satellite and Space Communications segment and $14.1 million was for the Terrestrial and Wireless Networks segment).

Impairment of Long-lived Assets, including Goodwill. During the fourth quarter of fiscal year 2024, our lower-than-expected financial performance, cured default on certain credit facility covenants and sustained decrease in our stock price since August 1, 2023 were each considered triggering events requiring an interim quantitative goodwill impairment test as of July 31, 2024. Based on our quantitative evaluation, we determined that our Satellite and Space Communications reporting unit had an estimated fair value below its carrying value and concluded that our goodwill in this reporting unit was impaired. As a result, in the fourth quarter of fiscal 2024, we recognized a non-cash $48.9 million goodwill impairment charge in our Satellite and Space Communications reporting unit. In addition to testing goodwill associated with our Satellite and Space Communications reporting unit for impairment, we also assessed the recoverability of the carrying values of our other long-lived assets, including identifiable intangible assets with finite useful lives. Such testing also considered our decision in the fourth quarter of fiscal 2024 to cease our steerable antenna operations located in the United Kingdom. Based on our evaluation, we determined that the fair value of the asset group related to such operations was lower than its carrying value and recorded a non-cash $15.6 million long-lived asset impairment charge in our Satellite and Space Communications segment. See"Notes to Consolidated Financial Statements" included in"Part II - Item 8. Financial Statements and Supplementary Data" included in this Form 10-K for further information.

CEO Transition Costs. For the three fiscal years ended July 31, 2024, cumulative CEO transition costs aggregated $25.6 million. CEO transition costs were $2.9 million for fiscal 2024 and principally consisted of legal expenses related to the March 2024 termination of our former CEO, Mr. Peterman, for cause due to conduct unrelated to our business strategy, financial results or previously filed financial statements. CEO transition costs were $9.1 million for fiscal 2023, of which $7.4 million related to our former President and CEO, Mr. Porcelain, pursuant to his separation agreement with the Company, and $1.7 million related our other former CEO, Mr. Kornberg. CEO transition costs were $13.6 million for fiscal 2022 and entirely related to our former CEO, Mr. Kornberg. CEO transition costs are expensed in our Unallocated segment.

Loss on Business Divestiture. In connection with the PST Divestiture, during fiscal 2024, we recorded a $1.2 million loss in our Unallocated segment due to the acquirer not achieving certain post-divestiture earn-out criteria. Although a loss for GAAP purposes, the PST Divestiture resulted in a gain for tax purposes. However, we completed the PST Divestiture in a tax efficient manner as we utilized a portion of the capital loss carryforward (related to the failed 2020 Gilat acquisition) which was set to expire in 2026.

Operating (Loss) Income. Operating loss for fiscal 2024 and 2023 was $79.9 million and $14.7 million, respectively. Operating (loss) income by reportable segment is shown in the table below:

Our GAAP operating loss of $79.9 million for fiscal 2024 reflects: (i) a $64.5 million non-cash charge related to the impairment of certain long-lived assets, including goodwill, in our Satellite and Space Communications segment; (ii) $21.2 million of amortization of intangibles; (iii) $12.5 million of restructuring costs (of which $3.8 million, $0.6 million and $8.1 million related to our Satellite and Space Communications, Terrestrial and Wireless Networks and Unallocated segments, respectively); (iv) $6.1 million of amortization of stock-based compensation; (v) $4.1 million of strategic emerging technology costs; (vi) $2.9 million of CEO transition costs; (vii) a $1.2 million loss on the PST Divestiture reported in our Unallocated segment; and (viii) $1.0 million of amortization of cost to fulfill assets, as discussed above. Excluding such items, our consolidated operating income for fiscal 2024 would have been $33.5 million.

Our GAAP operating loss of $14.7 million for fiscal 2023 reflects: (i) $21.4 million of amortization of intangibles; (ii) $10.9 million of restructuring costs (of which $5.7 million, $1.3 million and $3.9 million related to our Satellite and Space Communications, Terrestrial and Wireless Networks and Unallocated segments, respectively); (iii) $10.1 million of amortization of stock-based compensation; (iv) $9.1 million of CEO transition costs; (v) $3.8 million of strategic emerging technology costs; and (vi) $1.0 million of amortization of cost to fulfill assets, as discussed above. Excluding such items, our consolidated operating income for fiscal 2023 would have been $41.6 million.

The decrease in operating income, excluding the above items, from $41.6 million for fiscal 2023 to $33.5 million for fiscal 2024 primarily reflects lower consolidated net sales and gross profit (both in dollars and as a percentage of consolidated net sales) and higher selling, general and administrative expenses (due to increased headcount, legal and professional fees and cash incentive compensation), offset in part by lower research and development expenses in both of our reportable operating segments, as discussed above. Operating income (loss) by reportable segment is further discussed below.

The significant decrease in our Satellite and Space Communications segment operating income for fiscal 2024 primarily reflects the non-cash impairment charge related to certain long-lived assets, including goodwill, and lower net sales and gross profit (both in dollars and as a percentage of related segment net sales), offset in part by lower research and development expenses, as discussed above.

The significant increase in our Terrestrial and Wireless Networks segment operating income, both in dollars and as a percentage of the related segment net sales, for fiscal 2024 reflects lower research and development expenses, as discussed above.

Excluding the loss on the PST Divestiture, the impact of CEO transition costs and its respective portion of restructuring charges in each period, Unallocated expenses for fiscal 2024 would have been $35.3 million, as compared to $29.0 million for fiscal 2023. The increase in Unallocated expenses, excluding such items, was primarily due to higher selling, general and administrative expenses, as discussed above. Amortization of stock-based compensation was $6.1 million and $10.1 million, respectively, for fiscal 2024 and 2023. Although higher in the prior fiscal 2023 period, both fiscal 2024 and 2023 include fully vested stock-based awards granted to certain employees in lieu of annual non-equity incentive compensation. Also, stock-based compensation for the more recent period reflects a benefit associated with the forfeitures of awards related to our former CEO.

Interest Expense and Other. Interest expense was $22.2 million and $15.0 million for fiscal 2024 and 2023, respectively. The increase is due to a higher average debt balance outstanding during fiscal 2024, a general rise in interest rates compared to the prior year and higher interest rates under our Credit Facility entered into in June 2024 (see"Notes to Consolidated Financial Statements - Note (8) - Credit Facility" included in "Part II - Item 8. Financial Statements and Supplementary Data" for further discussion of the Credit Facility). Our effective interest rate (including amortization of deferred financing costs) in fiscal 2024 was approximately 12.3% as compared to 8.9% in fiscal 2023. Our current cash borrowing rate (which excludes the amortization of deferred financing costs) under our Credit Facility is approximately 14.8%.

Interest (Income) and Other. Interest (income) and other for both fiscal 2024 and 2023 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.

Write-off of Deferred Financing Costs. During the fourth quarter of fiscal 2024, in connection with the extinguishment and refinancing of our Prior Credit Facility through a new syndicate of lenders, we fully expensed all $1.8 million of the remaining deferred financing costs related to the Prior Credit Facility.

Change in Fair Value of Warrants. During fiscal 2024, we recorded a $4.3 million net benefit from the remeasurement of warrants. The net benefit was driven by the impact of a lower market price of our common stock after the issuance of the warrants to the holders of our Series B-1 Convertible Preferred Stock in January 2024, offset in part by a higher market price of our common stock after the issuance of warrants to certain lenders under our Credit Facility in June 2024. See"Notes to Consolidated Financial Statements - Note (16) - Convertible Preferred Stock" and "Note (8) - Credit Facility" included in "Part II - Item 8. Financial Statements and Supplementary Data" for more information.

Benefit from Income Taxes. For fiscal 2024 and 2023, we recorded tax benefits of $0.3 million and $3.9 million, respectively. Our effective tax rate (excluding discrete tax items) for fiscal 2024 was 8.1%, as compared to 14.5% for fiscal 2023. The decrease in the rate is primarily due to changes in expected product and geographical mix. For purposes of determining our 8.1% effective tax rate for fiscal 2024, the impairment of long-lived assets, including goodwill, the change in fair value of warrants, CEO transition costs and the impact of the PST Divestiture are each considered significant, unusual or infrequently occurring discrete tax items and excluded from the computation of our effective tax rate. For purposes of determining our 14.5% effective tax rate for fiscal 2023, CEO transition costs were considered significant, unusual or infrequently occurring discrete tax items and excluded from the computation of our effective tax rate.

During fiscal 2024, we recorded a net discrete tax expense of $2.7 million, primarily related to stock-based awards and the establishment of a valuation allowance on U.S. net deferred tax assets, partially offset by the reversal of tax contingencies no longer required due to the expiration of applicable statute of limitations. During fiscal 2023, we recorded a net discrete tax benefit of $0.8 million, primarily related to the reversal of tax contingencies no longer required due to the expiration of applicable statute of limitations and the deductible portion of CEO transition costs, offset in part by the settlement of stock-based awards and the finalization of certain tax accounts in connection with our fiscal 2022 federal and state income tax returns.

Our U.S federal income tax returns for fiscal 2021 through 2023 are subject to potential future IRS audit. None of our state income tax returns prior to fiscal 2020 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 Attributable to Common Stockholders. During fiscal 2024 and 2023, consolidated net loss attributable to common stockholders was $135.4 million and $33.9 million, respectively. In addition to those items discussed above, the more recent period also includes: (i) $19.6 million of expenses related to the exchange of our Series A-1 Convertible Preferred Stock for Series B Convertible Preferred Stock on January 22, 2024 (inclusive of the initial fair value of warrants issued to such holders) and the exchange of our Series B Convertible Preferred Stock for Series B-1 Convertible Preferred Stock on June 17, 2024; (ii) $11.6 million of dividends related to our Convertible Preferred Stock outstanding during fiscal 2024; and (iii) $4.3 million of Series B Convertible Preferred Stock issuance costs (consisting of third party financial advisor, legal and professional fees).

Adjusted EBITDA. Adjusted EBITDA (both in dollars and as a percentage of related net sales) for both fiscal 2024 and 2023 are shown in the table below (numbers in the table may not foot due to rounding):

The decrease in consolidated Adjusted EBITDA, both in dollars and as a percentage of consolidated net sales, for fiscal 2024 as compared to fiscal 2023 primarily reflects lower consolidated net sales and gross profit (both in dollars and as a percentage of consolidated net sales) and higher selling, general and administrative expenses, offset in part by lower research and development expenses in both of our reportable operating segments, as discussed above.

The decrease in our Satellite and Space Communications segment's Adjusted EBITDA, both in dollars and as a percentage of related segment net sales, primarily reflects lower net sales and gross profit (both in dollars and as a percentage of related segment net sales), offset in part by lower research and development expenses, as discussed above

The increase in our Terrestrial and Wireless Networks segment's Adjusted EBITDA, both in dollars and as a percentage of related segment net sales, reflects lower research and development expenses, offset in part by a lower gross profit percentage on related segment 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 segment as well as unallocated spending, it is inherently difficult to forecast. Also, our consolidated Adjusted EBITDA could be impacted by the timing and outcome of our recently announced strategy to transform Comtech into a pure-play satellite and space communications company.

Reconciliations of our GAAP consolidated operating loss, net loss attributable to common stockholders and net loss per diluted common share for fiscal 2024 and 2023 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). Non-GAAP net income attributable to common stockholders and net income per diluted common share reflect Non-GAAP provisions for income taxes based on full year results, as adjusted for the Non-GAAP reconciling items included in the tables below. We evaluate our Non-GAAP effective income tax rate on an ongoing basis, and it can change from time to time. Our Non-GAAP effective income tax rate can differ materially from our GAAP effective income tax rate. In addition, due to the GAAP net loss for the period, Non-GAAP EPS for fiscal 2024 and 2023 was computed using weighted average diluted shares outstanding of 29,132,000 and 28,376,000, respectively.

Our Adjusted EBITDA is a Non-GAAP measure that represents earnings (loss) before interest, income taxes, depreciation expense, amortization of intangibles, amortization of stock-based compensation, amortization of cost to fulfill assets, restructuring costs, strategic emerging technology costs (for next-generation satellite technology), change in fair value of warrants and derivatives, write-off of deferred financing costs, CEO transition costs, impairment of long-lived assets, including goodwill, loss on business divestiture and, in the past, acquisition plan expenses, change in fair value of convertible preferred stock purchase option liability, COVID-19 related costs, facility exit costs, proxy solicitation costs and strategic alternatives analysis expenses and other. Although closely aligned, our definition of Adjusted EBITDA is different than EBITDA (as such term is defined in our Credit Facility) utilized for financial covenant calculations and also may differ from the definition of EBITDA or Adjusted EBITDA used by other companies and therefore may not be comparable to similarly titled measures used by other companies. 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, including GAAP measures, in assessing our performance and comparability of our results with other companies. Our Non-GAAP measures reflect the GAAP measures as reported, adjusted for certain items as described herein and also excludes the effects of our outstanding convertible preferred stock.

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 measures in the tables presented herein, 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. As we have not provided targets for fiscal 2025, we have also not quantitatively reconciled our fiscal 2025 outlook to comparable GAAP measures. Furthermore, even if targets had been provided, items such as stock-based compensation, adjustments to the provision for income taxes, amortization of intangibles and interest expense, which are specific items that impact these measures, have not yet occurred, are out of our control, or cannot be predicted. For example, quantification of stock-based compensation expense requires inputs such as the number of shares granted and market price that are not currently ascertainable. Accordingly, reconciliations to the Non-GAAP forward looking metrics are not available without unreasonable effort and such unavailable reconciling items could significantly impact our financial results.