Comtech Telecommunications Corp. — Q3 FY2022 Form 10-Q
Reporting period: Three and nine months ended April 30, 2022; fiscal year ends July 31. The company provides commercial and government satellite communications, public safety and location technologies. Figures below are unaudited.
Financial performance and liquidity
| Metric | Three months ended April 30 | Nine months ended April 30 |
|---|---|---|
| Net sales | $122.1 million, down 12.4% from $139.4 million | $359.3 million, down 17.6% from $435.9 million |
| Gross profit / margin | $46.7 million / 38.2%, versus $53.0 million / 38.0% | $134.3 million / 37.4%, versus $158.9 million / 36.5% |
| Operating income (loss) | $(0.6) million, versus $2.4 million | $(31.7) million, versus $(78.0) million |
| Net income (loss) attributable to common stockholders | $(1.7) million, or $(0.06) per diluted share, versus $0.8 million, or $0.03 | $(36.4) million, or $(1.37) per diluted share, versus $(80.8) million, or $(3.12) |
| Adjusted EBITDA | $11.2 million, versus $17.7 million | $26.5 million, versus $50.1 million |
Quarterly gross margin was slightly higher year over year; the prior-year quarter included a $2.0 million excise-tax refund benefit. For the nine-month periods, excluding the respective $2.5 million warranty-accrual benefit in 2022 and $2.0 million excise-tax refund in 2021, gross margins were 36.7% and 36.0%. Adjusted EBITDA is a company-defined non-GAAP measure and excludes specified costs.
- Segments: Q3 Commercial Solutions revenue was $88.1 million, down 3.6%; Government Solutions was $34.0 million, down 29.2%. Nine-month revenue declined 4.9% and 36.6%, respectively. The company cited lower government program activity and timing of orders, among other factors.
- Cash flow: Nine-month operating cash flow was $8.4 million, versus a $56.6 million use in 2021. The 2022 amount included $13.5 million of former-CEO and proxy-contest payments; excluding these, management reported $21.9 million of operating cash flow. Investing used $14.4 million, primarily for facilities and NG-911 infrastructure. Financing provided $8.0 million, including $100 million from preferred stock issuance and $74 million of net debt repayments. Cash at April 30 was $32.8 million. Management separately reported Q3 operating cash use of $1.1 million.
- Balance sheet and debt: Current assets were $275.5 million and current liabilities $204.9 million. Debt under the revolving credit facility was $127.0 million; the facility matures October 31, 2023. The company reported a 2.40x secured leverage ratio against a 3.75x maximum, and 12.12x interest coverage against a 3.25x minimum. Management expects covenant compliance but anticipates leverage increasing in Q4. The facility is secured by substantially all company and guarantor assets.
- Other balance-sheet items: Inventory increased to $95.2 million from $80.4 million at July 31, 2021; contract liabilities rose to $76.6 million from $66.1 million. Convertible preferred stock was recorded as $103.5 million of temporary equity at April 30.
Material changes, outlook and risks
- Fiscal 2022 targets were reduced to approximately $482 million of revenue and $38 million of Adjusted EBITDA, from prior targets of $520 million and $50 million. Q4 targets are approximately $123 million and $11.5 million, respectively. The company did not provide a GAAP reconciliation for forward-looking Adjusted EBITDA, citing the impracticability of estimating certain items.
- The expected FY2022 effective tax rate increased to 28.25% from 19.75%, attributed to expected product and geographic mix. Management expects challenging conditions to continue into fiscal 2023.
- Management cited COVID-19 and Russia-Ukraine-related supply constraints, component shortages, inflation, labor and logistics costs, production delays and lower factory utilization. Some opportunities were deferred to FY2023: Ohio’s statewide NG-911 funding vote was expected in fall 2022; a southwest NG-911 project was also delayed. A prospective Asian government award was removed from expectations because of vendor price increases. The company expected no meaningful bookings or related sales from conflict-related troposcatter opportunities for the rest of FY2022.
- Comtech is relocating certain Russian software development and support work; updated guidance includes about $1.5 million of additional expense. It is also investing in new manufacturing facilities in Arizona and the UK, expected to be fully operational by early FY2023; supply constraints have delayed their build-out.
- The $100 million Series A preferred stock carries a cumulative 6.5% dividend, senior rights and potential dilution. Holders may convert after the FY2022 10-K or upon a change of control; an additional $25 million purchase option remains exercisable through March 2023. The UHP acquisition’s $9 million earn-out had been earned and was expected to be settled in Q4; the form of payment was undecided.
- Goodwill totaled $347.7 million. The annual August 2021 impairment test found fair value above carrying value, but management cited the lower share price, weaker conditions and risks to projections as possible impairment indicators for future testing. Other exposures include customer indemnification claims, uncertain tax positions and government contract funding and termination risks. A Delaware lawsuit related to the preferred issuance was dismissed May 3, 2022; management said its resolution was not materially adverse.
Important facts for investors to verify
- Whether Q4 sales and Adjusted EBITDA targets are achievable given component availability, delayed orders and government funding priorities.
- Bookings, book-to-bill and backlog trends: Q3 bookings were $113.4 million, book-to-bill 0.93x, and funded backlog $602.3 million, down from $611.1 million at January 31. Management’s revenue visibility estimate was approximately $1.2 billion and includes unfunded contract value.
- Cash conversion and working-capital needs, planned FY2022 capital expenditures of approximately $30 million, and settlement of the UHP earn-out.
- Facility covenant headroom and refinancing plans before the October 2023 maturity, as well as preferred dividends, conversion and potential dilution.
- Results of the August 2022 goodwill impairment analysis and whether supply-chain, geopolitical or customer-spending conditions materially change.