COMTECH TELECOMMUNICATIONS CORP quarterly report, Q1 FY2022

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Comtech Telecommunications Corp. — Q1 FY2022 Form 10-Q

Reporting period: Three months ended October 31, 2021; comparative period ended October 31, 2020. The filing is unaudited. Comtech provides satellite communications, public safety and location technologies, and government communications solutions through its Commercial Solutions and Government Solutions segments.

Financial performance and position

MetricQ1 FY2022Q1 FY2021
Revenue$116.8 million$135.2 million
Gross profit / margin$41.7 million / 35.7%$50.2 million / 37.1%
Operating loss$6.5 million$85.7 million
Net loss$6.0 million$85.8 million
Net loss attributable to common stockholders$11.2 million; diluted loss per share $0.43$85.8 million; diluted loss per share $3.39
Adjusted EBITDA (non-GAAP)$5.5 million$14.3 million
Cash from operating activities$4.8 million provided$74.2 million used
  • Revenue fell 13.6% year over year. Commercial Solutions revenue declined 3.5% to $78.9 million; Government Solutions fell 29.2% to $37.8 million.
  • The gross margin decline reflected lower sales, product mix, reduced factory utilization, supply-chain-related logistics and operating costs, and new manufacturing-center start-up costs.
  • Q1 FY2022 GAAP results included $2.2 million of proxy solicitation costs, $0.7 million of restructuring costs, and $0.7 million of COVID-related costs. Excluding specified items, management reported non-GAAP operating loss of $3.0 million and non-GAAP diluted loss per share of $0.15.
  • The prior-year quarter included $91.2 million of acquisition-plan expenses, principally related to the terminated Gilat transaction, including a $70.0 million cash payment. Excluding those costs, prior-year operating income was $5.5 million.
  • At October 31, 2021, cash was $30.9 million, total assets $983.0 million, current assets $274.0 million, current liabilities $197.0 million, and total liabilities $397.0 million. Accounts receivable were $136.8 million and inventory $87.7 million.
  • Long-term debt was $108.0 million, down from $201.0 million at July 31, 2021. The quarter included $93.0 million of net debt repayments. The reported secured leverage ratio was 1.57x, versus a 3.75x maximum; interest coverage was 12.78x, versus a 3.25x minimum.
  • Investing cash outflow was $3.6 million, mainly for NG-911 network build-outs and manufacturing-center investment. Cash was nearly unchanged during the quarter.

Material changes and notable items

  • Comtech raised $100.0 million in October through Series A convertible preferred stock issued to White Hat Capital Partners and Magnetar Capital. The investors may purchase an additional $25.0 million by March 31, 2023.
  • The preferred stock carries a cumulative 6.5% annual dividend, compounding quarterly, payable in cash or in kind at Comtech’s election; it ranks senior to common stock and has conversion and redemption provisions. Its initial conversion price is $24.50, subject to adjustment upon meeting a specified FY2022 Adjusted EBITDA threshold.
  • Bookings were $86.4 million, a 0.74x book-to-bill ratio. Funded backlog was $628.5 million, $23.0 million above the prior-year comparable date. Management cited revenue visibility exceeding $1.2 billion when funded backlog and expected future orders under awarded multi-year contracts are combined.
  • Comtech acquired UHP Networks in March 2021. A potential earn-out of up to $9.0 million depends on sales milestones through September 30, 2022. The quarter included only nominal UHP revenue.
  • Management announced Michael D. Porcelain would succeed Fred Kornberg as CEO by the end of calendar 2021; transition costs had not been finalized.

Outlook, commentary and risks

  • Management maintained FY2022 targets of revenue of $580 million to $600 million and Adjusted EBITDA of $70 million to $76 million. It said Q1 revenue and Adjusted EBITDA exceeded expectations, but did not provide GAAP earnings or EPS guidance or a reconciliation to its non-GAAP targets.
  • Management expects fiscal-year book-to-bill above 1.00x, sequential improvement through the year, and a particularly strong fourth quarter. It expects the first half to be significantly below the prior-year comparison and the second half significantly above it.
  • Commercial Solutions is expected to grow year over year, supported by NG-911, location services, satellite earth-station demand, and UHP technologies. Government Solutions revenue is expected to decline year over year, partly due to the U.S. withdrawal from Afghanistan and program changes; management expects later-period benefits from troposcatter programs and new orders.
  • COVID-19 and global supply constraints continue to cause order and production delays, lower factory utilization, and higher logistics and operating costs. Management said forecasting remains difficult and noted potential start-up, restructuring, proxy-contest, and CEO-transition expenses.
  • Risks include variable government funding and contract timing, long-term contract cost-estimate revisions, customer demand and procurement changes, supply disruption, and potential goodwill or intangible impairment if forecasts weaken. Comtech reported no material change to previously disclosed risk factors.
  • A shareholder proxy contest resulted in $2.2 million of Q1 solicitation costs; the company expected similar costs in Q2. Related litigation over the preferred-stock transaction was addressed by a stipulation that included additional proxy disclosures; the plaintiff reserved certain rights to pursue claims after the annual meeting.
  • Management stated liquidity was sufficient for anticipated requirements. The credit facility matures October 31, 2023 and is secured by substantially all assets of the company and guarantors. Common dividends remain subject to covenant compliance and board approval; the declared quarterly dividend was $0.10 per share.

Important facts for investors to verify

  • Whether the FY2022 revenue and Adjusted EBITDA targets remain achievable given the weaker Q1 revenue, lower margins, supply constraints, and expected back-half weighting.
  • Actual cash requirements for the two manufacturing centers, NG-911 deployments, and the preferred stock’s 6.5% dividend, including whether dividends are paid in cash or added to liquidation preference.
  • Preferred-stock conversion, voting, repurchase, and change-of-control terms, and the potential dilution or cash obligations they could create.
  • Conversion of backlog and multi-year contract value into funded orders, revenue, and cash collections, particularly for government programs and NG-911 awards awaiting funding.
  • Progress on supply-chain recovery, factory utilization, segment margins, and the Government Solutions outlook.
  • Outcomes and costs of the proxy contest, legal matters, CEO transition, and UHP earn-out; also monitor credit-facility covenant headroom and the 2023 maturity.