Comtech Announces Transformation Strategy and Capital Structure Update

October 17, 2024

Comtech announced that its Board of Directors and management team are executing a strategy to transform Comtech into a pure-play satellite and space communications company and provided a capital structure update.

Ongoing and future actions supporting Comtech’s transformation strategy include:

An exploration of strategic alternatives for the Company’s Terrestrial & Wireless Networks (“T&W”) segment, which is well underway;

The pursuit of further portfolio-shaping opportunities to enhance profitability, efficiency and focus; and

The implementation of additional operational initiatives to align Comtech’s go-forward cost structure with a pure-play focus on satellite and space communications.

Comtech’s Board of Directors noted, “Comtech is in the midst of a transformational journey. Earlier this year, we enhanced our T&W segment with a new management team to drive growth and improved profitability. Given the strength and value we see in our T&W segment, we initiated a process to explore strategic alternatives for this business to unlock value for Comtech shareholders. We believe the best path forward for shareholders is the creation of a pure-play satellite and space communications company with a simplified capital structure, streamlined operations and strong balance sheet. This strategy is the product of months of careful evaluation conducted with the assistance of management and independent advisors. We look forward to providing an update on the strategic alternatives process and broader strategy at key milestones.”

Strategic Alternatives Process for the T&W Segment

Comtech’s T&W business is a leading provider of next-generation 911 (“NG911”) infrastructure and solutions for state and local governments and telecom carriers across North America. Enhanced by the leadership of new executive management, in fiscal 2024, the T&W segment has more than doubled its bookings of orders for next-generation solutions. Additionally, as a result of a more refined strategic focus and the achievement of certain cost-containment and operational efficiency measures, T&W is on track to delivering strong year-over-year bottom line performance.

Comtech’s recent T&W wins and milestones include a long-term competitive contract renewal for NG911 solutions in the Commonwealth of Massachusetts; the buildout of Pennsylvania’s NG911 statewide network; a mandate for the Toronto Police Service’s NG911 solution; a long-term NG911 renewal with the North Central Texas Emergency Communications District; a statewide NG911 solution in the Northeast U.S. in partnership with Consolidated Communications; and multi-province NG911 deployments in Canada. Demand for these solutions is expected to continue growing following a July 2024 ruling by the U.S. Federal Communications Commission to advance the nationwide transition to NG911.

The Board had previously retained independent financial advisors to assist in its strategic review earlier this year and, in recent months, commenced a strategic alternatives process for the T&W business.

The Board added, “Comtech deeply values its T&W customers, who put their trust in our best-in-class public safety solutions to keep their communities and people connected in their most critical moments. We expect to move forward with a partner who will focus on this attractive business and its customers, talented team members and valued service providers.”

There can be no assurance that the exploration of strategic alternatives will result in a transaction or other strategic changes or outcomes. There is no timeframe for the conclusion of the process, and the Company does not intend to comment further regarding this matter unless and until further disclosure is determined to be appropriate or necessary.

Pure-Play Satellite and Space Communications Company

Comtech’s Satellite & Space Communications (“S&S”) segment is a U.S.-based, leading provider of advanced modems and high-power amplifier technologies, and a market leader in troposcatter technologies. The S&S segment has an innovative portfolio of these mission-critical technologies and serves some of the world’s largest defense contractors and allied foreign governments, as well as multiple U.S. government agencies, including branches of the U.S. Armed Forces, U.S. Department of Defense (“DoD”) and U.S. Space Force (“USSF”), among others.

The S&S business operates in large and growing end markets that benefit from multiple tailwinds and demand-drivers, including growing global geopolitical tensions, rising global defense spending, and high barriers to entry. Further, these end markets are undergoing technology upgrade cycles and modernization initiatives that are expected to underpin demand for years to come. Fueling these cycles are the USSF’s Commercial Space Strategy and the DoD’s Joint All Domain Command and Control approach, which are expected to generate strong demand for the S&S business’ next-generation digital solutions. Today, only a limited number of companies, including Comtech, can serve the complex needs of the U.S. and other governments and meet this demand.

Proceeds from the potential divestiture of T&W would enable Comtech to substantially simplify its capital structure and strengthen its balance sheet. Paired with additional targeted portfolio optimization and a singular focus on satellite and space communications, the go-forward company would be well-positioned to capitalize on growth opportunities.

Portfolio-Shaping and Operational Initiatives

In connection with the Board’s transformative strategy, the Company has undertaken a detailed evaluation of its S&S portfolio to identify opportunities to divest, separate and/or rationalize businesses or facilities that are not core to Comtech’s go-forward focus.

Consistent with this effort, in its fourth fiscal quarter, Comtech made the decision to exit its subsidiary operations in Basingstoke, United Kingdom. The U.K. operations were established in connection with the prior management team’s 2020 acquisition of CGC Technology Limited, which primarily served customers in Europe. Following the acquisition, Comtech continued to invest in the Basingstoke facility to advance LEO constellation-based antenna technologies in anticipation of a significant production order. Taking into consideration the significant ongoing investment as well as unfavorable contract terms on prospective antenna sales, the Board concluded the U.K. business would not generate an attractive return on invested capital and made the decision to exit these operations. After anticipated restructuring charges associated with the exit of the Basingstoke operations, Comtech expects to realize approximately $10 million of annual cash savings.

In addition to its ongoing efforts to improve the cash conversion cycle and manage the balance sheet, Comtech has been working with independent advisors to identify opportunities to align the Company’s cost structure with its go-forward focus on satellite and space communications.

Furthermore, over the past several months, Comtech has conducted an intensive review of its product portfolio to focus future investment on the Company’s most strategic, high-margin revenue opportunities within its S&S portfolio. While anticipated to improve the Company’s profitability in future periods, such actions may result in near-term restructuring charges.

Amended Credit Agreement and New Subordinated Term Loan Facility

On October 16, 2024, Comtech filed a Form 12b-25 with the Securities and Exchange Commission (“SEC”) noting that it is unable to file its Annual Report on Form 10-K for the period ended July 31, 2024 within the prescribed time period without unreasonable effort or expense, and that the Company anticipates reporting significantly lower-than-expected performance, primarily in its S&S segment, in the fourth fiscal quarter.

In light of this, the Company entered into an amendment to its existing credit facility dated June 17, 2024. Among other things, the amendment waives defaults or events of default in connection with the Company’s Net Leverage Ratio and Fixed Charge Coverage Ratio covenants for the fourth fiscal quarter. To cure defaults, maintain appropriate liquidity and support the Company’s transformation initiatives, Comtech entered into a new $25.0 million subordinated unsecured term loan facility with the existing holders of the Company’s convertible preferred stock. Within the terms of the amended credit facility, this new subordinated unsecured term loan allows the Company to maintain a consistent level of borrowing capacity.

Additional information related to the Company’s credit facilities can be found in a Form 8-K that will be filed with the SEC.