Comtech Telecommunications Corp. — Fiscal 2023 Third-Quarter 10-Q
Reporting period: Quarter ended April 30, 2023; results are unaudited. Comtech provides next-generation 911, satellite and space communications, and wireless network technologies through Satellite and Space Communications and Terrestrial and Wireless Networks.
Financial performance and position
| Metric | Q3 FY2023 | Comparable period |
|---|---|---|
| Revenue | $136.3 million | $122.1 million; up 11.6% year over year |
| Gross profit / margin | $43.1 million / 31.7% | $46.7 million / 38.2% |
| Operating loss | $5.3 million | $0.6 million loss |
| Net loss attributable to common stockholders | $9.2 million; $0.33 per share | $1.7 million; $0.06 per share |
| Adjusted EBITDA | $12.5 million; 9.2% of revenue | $11.2 million; 9.2% of revenue |
| Bookings / book-to-bill | $102.8 million / 0.75x | — |
| Funded backlog | $668.4 million | $702.0 million at Jan. 31, 2023; $602.3 million at Apr. 30, 2022 |
Satellite and Space Communications revenue rose 18.9% to $82.2 million, primarily on higher troposcatter and SATCOM sales. Terrestrial and Wireless Networks revenue increased 2.1% to $54.1 million. Q3 gross margin fell from both the prior-year quarter and the second-quarter FY2023 level of 34.3%; management cited product mix, startup costs at new manufacturing centers, and inflationary and pandemic-related cost pressures.
For the nine months ended April 30, revenue was $401.2 million, up 11.7%; gross profit was $135.9 million and gross margin was 33.9%, versus 37.4% a year earlier. The company recorded a $23.4 million net loss and a $28.6 million loss attributable to common stockholders, compared with $27.9 million and $36.4 million, respectively. Adjusted EBITDA was $34.6 million, or 8.6% of revenue, versus $26.5 million, or 7.4%.
Q3 operating cash flow was reported as $16.6 million in management’s highlights. For the nine-month period, cash used in operating activities was $0.2 million, compared with $8.4 million provided in the prior-year period; investing activities used $14.9 million, mainly for facility, manufacturing, and NG-911 network investments. Cash was $21.4 million at April 30, versus $21.7 million at July 31, 2022.
At April 30, total debt outstanding under the credit facility was approximately $159.8 million, comprising $111.0 million revolver borrowings and $48.8 million of term debt. The facility matures October 31, 2024. Reported secured leverage was 3.73x against a 4.00x maximum; the maximum steps down to 3.75x for the quarter ending July 31, 2023. Interest coverage was 4.11x against a 3.25x minimum, and minimum liquidity was $32.5 million against a $25.0 million requirement. The blended borrowing rate was approximately 10.1% in Q3, versus 3.3% a year earlier.
Material changes, outlook, and risks
- Management targets Q4 FY2023 revenue growth of approximately 2%–4% sequentially and an Adjusted EBITDA margin of 9.5%–10.5%. It did not provide a GAAP reconciliation for this forward-looking non-GAAP guidance, citing unreasonable effort.
- The “One Comtech” transformation includes streamlining operations, workforce reductions, and lean initiatives; management expects related severance costs to be immaterial. The company completed its move to a new 146,000-square-foot Chandler, Arizona facility during Q3.
- Management cited unpredictable conditions, inflation, higher interest rates, possible recession, component availability and production delays, labor and logistics costs, and lower factory utilization. Government contract funding and ordering are uncertain, and quarter-to-quarter results may fluctuate.
- Management expects existing cash, operating cash generation, and potential credit-facility availability to meet anticipated needs over the next twelve months and beyond, but cautioned it cannot assure continued covenant compliance. Interest expense is sensitive to rates.
- The Board elected to forgo the common-stock dividend during Q3 to increase financial flexibility. Series A convertible preferred stock remains outstanding, carries a 6.5% cumulative dividend, and had a $110.4 million redemption value; holder redemption rights generally begin in October 2026.
- Indemnification demands, including matters involving alleged improper 911 call routing, could create legal costs or damages; insurance coverage is not assured. The company said other pending and threatened matters are not expected to have a material adverse effect. Goodwill was not impaired in the latest assessment, but future deterioration in business conditions or projections could require impairment testing or charges.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. The filing disclosed no material changes to the risk factors in the prior Form 10-K.
Adjusted EBITDA and other non-GAAP measures exclude specified costs and are not substitutes for GAAP results; the filing notes that definitions may differ from those used by other companies.
Important facts for investors to verify
- Whether gross-margin pressure eases and Q4 revenue and Adjusted EBITDA margin targets are achieved.
- Bookings and book-to-bill trends, especially the 0.47x Q3 ratio in Terrestrial and Wireless Networks, and conversion of the $668.4 million funded backlog to revenue and cash.
- Working-capital and operating cash-flow performance, and continued access to liquidity.
- Credit-covenant headroom as the maximum leverage ratio tightens to 3.75x after April 30, alongside debt-service costs and the October 2024 facility maturity.
- Execution of the One Comtech initiatives, restructuring costs, manufacturing relocation, and planned NG-911 capital investments.
- Potential legal exposure, tax assessments, and future impairment risks; also review the preferred stock’s cumulative dividends and redemption/conversion terms.