Comtech Telecommunications Corp. — Q2 FY2023 Form 10-Q
Reporting period: Quarter and six months ended January 31, 2023. Results are unaudited. Comtech provides next-generation 911, satellite and space communications, and wireless network solutions.
Financial performance
| Metric | Q2 FY2023 | Q2 FY2022 | Six months FY2023 | Six months FY2022 |
|---|---|---|---|---|
| Net sales | $133.7m | $120.4m | $264.9m | $237.1m |
| Gross profit / margin | $45.9m / 34.3% | $45.9m / 38.1% | $92.7m / 35.0% | $87.6m / 36.9% |
| Operating loss | $(0.8)m | $(24.6)m | $(10.5)m | $(31.1)m |
| Net loss attributable to common stockholders | $(6.5)m; $(0.23) per share | $(23.5)m; $(0.89) per share | $(19.3)m; $(0.69) per share | $(34.7)m; $(1.31) per share |
| Adjusted EBITDA (non-GAAP) | $11.3m; 8.5% of sales | $9.8m; 8.1% of sales | $22.1m; 8.3% of sales | $15.3m; 6.5% of sales |
- Q2 sales rose 11.0% year over year, while gross profit was essentially unchanged and margin contracted 3.8 percentage points. Management cited product mix, inflation and manufacturing start-up costs; a $1.5m benefit from lower-than-expected NG-911 warranty claims also supported gross profit.
- Satellite and Space Communications sales grew 16.2% in Q2 and 20.6% for the six-month period. Terrestrial and Wireless Networks sales grew 4.1% in Q2 but were nearly flat for six months. Q2 book-to-bill was 1.71x and 0.56x, respectively.
- Q2 operating results included $1.5m of restructuring costs and $0.7m of strategic emerging technology costs. The prior-year quarter included $13.6m of CEO transition costs and $9.1m of proxy solicitation costs, contributing to the year-over-year improvement in reported operating loss.
Cash flow, debt and liquidity
- Cash and cash equivalents were $21.5m at January 31, 2023, versus $21.7m at July 31, 2022. Current assets were $276.4m and current liabilities $186.2m.
- For the six months, operating cash flow was a use of $16.8m, compared with $9.6m provided a year earlier; investing cash use was $9.9m, mainly capital spending. Financing provided $26.6m, including net borrowings. Management said operating cash use excluding $5.6m of CEO transition payments was $11.2m.
- Debt outstanding under the refinanced credit facility was $168.4m gross ($167.5m net of deferred financing costs). The facility matures October 2024 and bears variable interest; the reported blended rate was 8.8% in Q2 versus 3.4% a year earlier.
- At quarter-end, secured leverage was 3.81x against a 4.25x maximum; interest coverage was 5.98x against a 3.25x minimum. Minimum liquidity was $40.5m against a $25.0m requirement. The maximum leverage covenant steps down to 4.00x for April 2023 and 3.75x for July 2023.
Outlook, commentary and risks
- For Q3 FY2023, management targeted sequential sales growth of approximately 1%–3% and Adjusted EBITDA margin of 8.5%–10.0%. The filing does not provide a quantitative reconciliation of this non-GAAP outlook to GAAP.
- Management cited inflation, higher interest rates, the Russia-Ukraine conflict, possible recession, component availability, order and production delays, labor and logistics costs, and lower factory utilization as ongoing challenges. It cautioned that order timing, government funding and contract performance can cause significant period-to-period fluctuations.
- The “One Comtech” transformation includes streamlining operations and a workforce reduction in Q3; related severance was not expected to be material. The company also said it would forgo common-stock dividends beginning in Q3 to increase financial flexibility. The $0.10-per-share dividend declared in December was paid February 17, 2023.
- Backlog was $702.0m at January 31, up from $668.2m at October 31, 2022; stated revenue visibility was approximately $1.1bn. Backlog excludes unexercised options and potential orders under IDIQ contracts.
- Risks include covenant compliance as leverage limits tighten, variable-rate debt, execution of the transformation and facility investments, estimates on long-term contracts and warranties, customer concentration and government funding uncertainty, potential goodwill impairment, tax uncertainties, and indemnification or other legal claims. Management reported no material change to previously disclosed risk factors.
Most important facts for investors to verify
- Whether operating cash flow and working-capital trends improve, and whether capital spending remains within available liquidity.
- Progress against the tightening leverage covenant limits and the company’s ability to maintain required liquidity and interest coverage.
- Whether strong satellite bookings and backlog convert to revenue, and whether Terrestrial and Wireless Networks’ below-1.0x Q2 book-to-bill improves.
- Whether gross margins recover despite inflation and start-up costs, and how much reported improvement depends on warranty benefits and non-GAAP exclusions.
- The financial and dilution implications of the Series A preferred stock, including cumulative dividends, conversion and potential redemption rights, and the discontinued common dividend.