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Comtech Telecommunications(CMTL) - 2024 Q1 - Quarterly Report

Part I. Financial Information Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion highlights a Q1 FY2024 financial turnaround with positive operating income and record bookings, despite substantial doubt about going concern due to liquidity and debt maturity Fiscal 2024: First Quarter Highlights and Business Outlook Q1 FY2024 saw positive GAAP operating income, record bookings, and significant contract wins, with Q2 FY2024 targeting modest sales growth and improved Adjusted EBITDA margin Q1 Fiscal 2024 Financial Highlights | Metric | Q1 FY2024 | Q4 FY2023 | Q1 FY2023 | | :--- | :--- | :--- | :--- | | Consolidated Net Sales | $151.9M | $148.8M | $131.1M | | GAAP Operating Income (Loss) | $2.1M | $1.1M | ($9.7M) | | Adjusted EBITDA | $18.4M | $18.9M | $10.7M | | New Bookings | $185.6M | - | - | | Book-to-Bill Ratio | 1.22x | - | - | | Backlog | $695.9M | $662.2M | $668.2M | - The company secured a large, multi-year GFSR contract from the U.S. Army with a potential value of $544.0 million, expected to significantly contribute to net sales in the second half of fiscal 20248 - For the second quarter of fiscal 2024, the company is targeting a 1.0% to 3.0% increase in consolidated net sales and a consolidated Adjusted EBITDA margin between 11.0% and 13.0%10 - The Terrestrial and Wireless Networks segment extended enhanced 911 call routing services for a major U.S. wireless carrier, a contract valued at over $30.0 million9 Comparison of Results of Operations Consolidated net sales increased 15.9% year-over-year to $151.9 million, driven by the Satellite segment, shifting to GAAP operating income despite a gross margin decline Net Sales by Segment (Three Months Ended Oct 31) | Segment | 2023 | 2022 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Satellite and Space Communications | $102.4M | $80.9M | +$21.5M | +26.6% | | Terrestrial and Wireless Networks | $49.5M | $50.3M | -$0.8M | -1.6% | | Consolidated Total | $151.9M | $131.1M | +$20.8M | +15.9% | - The company achieved GAAP operating income of $2.1 million, a significant improvement from a $9.7 million loss in the prior-year quarter. Excluding special items, non-GAAP operating income was $15.3 million721366 - Gross profit margin decreased to 31.5% from 35.7% year-over-year, reflecting a shift in product and service mix, particularly higher sales of troposcatter and SATCOM solutions to U.S. government customers360 - Research and development expenses decreased by 38.7% to $7.8 million, driven by the 'One Comtech' initiative and prioritization of resources18363 Adjusted EBITDA by Segment (Three Months Ended Oct 31) | Segment | 2023 | 2022 | | :--- | :--- | :--- | | Satellite and Space Communications | $15.1M | $9.9M | | Terrestrial and Wireless Networks | $9.6M | $6.0M | | Unallocated | ($6.4M) | ($5.2M) | | Consolidated Total | $18.4M | $10.7M | Liquidity and Capital Resources The company faces significant liquidity challenges, raising substantial doubt about its going concern ability due to insufficient cash and upcoming debt maturity, actively pursuing mitigation strategies - The company has substantial doubt about its ability to continue as a going concern, as current cash and projected cash flows are deemed insufficient to fund operations and repay the Credit Facility maturing in October 2024113145 - Cash and cash equivalents decreased to $18.1 million at October 31, 2023, from $19.0 million at July 31, 2023. Net cash used in operating activities was $14.5 million for the quarter28401 - Mitigation plans include implementing cost savings, reducing working capital, reevaluating capital expenditures, seeking new debt or equity financing, and exploring strategic transactions like asset divestitures60121404 Contractual Cash Obligations (as of Oct 31, 2023) | Obligation | Total | Due Within 1 Year | | :--- | :--- | :--- | | Credit Facility - principal | $184.0M | $184.0M | | Credit Facility - interest | $17.1M | $17.1M | | Operating lease obligations | $48.5M | $8.7M | | Total | $249.5M | $209.7M | Notes to Condensed Consolidated Financial Statements Notes detail substantial doubt about going concern due to liquidity and debt maturity, alongside the PST divestiture, revenue disaggregation, and Credit Facility terms Note (1) General - Liquidity and Going Concern This note formally discloses substantial doubt about the company's ability to continue as a going concern due to insufficient liquidity and the upcoming Credit Facility maturity - The company has concluded that adverse conditions raise substantial doubt about its ability to continue as a going concern for the next twelve months116146151 - The primary reasons for this doubt are insufficient cash and expected liquidity to fund operations and repay the outstanding borrowings under the Credit Facility, which matures on October 31, 2024120149 Recent Operating Performance | Period | Metric | Value | | :--- | :--- | :--- | | Fiscal 2023, 2022, 2021 | Operating Losses | ($14.7M), ($33.8M), ($68.3M) | | Q1 FY2024 | Operating Income | $2.1M | | Q1 FY2024 | Net Cash Used in Operations | ($14.5M) | Note (2) Business Divestiture The company completed the divestiture of its Power Systems Technology product line for $35.7 million cash plus contingent consideration, reclassifying related assets and liabilities as held for sale - The company completed the sale of its Power Systems Technology (PST) product line on November 7, 2023181 PST Divestiture Details | Item | Value | | :--- | :--- | | Preliminary Sales Price | $35.7 million | | Contingent Consideration | Up to $5.0 million | | Assets Held for Sale | $44.9 million | | Liabilities Held for Sale | $10.6 million | Note (4) Revenue Recognition This note details Q1 FY2024 revenue disaggregation by segment, geography, and customer type, with total revenue of $151.9 million and a funded backlog of $695.9 million Revenue Disaggregation (Q1 FY2024) | Category | Satellite & Space | Terrestrial & Wireless | Total | | :--- | :--- | :--- | :--- | | Net Sales | $102.4M | $49.5M | $151.9M | | U.S. Government | $53.0M | $0.6M | $53.6M | | Domestic | $16.0M | $45.2M | $61.1M | | International | $33.4M | $3.7M | $37.2M | - As of October 31, 2023, the aggregate amount of remaining performance obligations (funded backlog) was $695.9 million, a substantial portion of which is expected to be recognized as revenue over the next 24 months165 Note (10) Credit Facility The Credit Facility, with $183.5 million outstanding and maturing October 2024, is now a current liability, though the company was covenant compliant, with recent amendments impacting borrowing limits and amortization - The Credit Facility matures on October 31, 2024, and the outstanding balance of $183.5 million has been classified as a current liability as of October 31, 2023237242 - As of October 31, 2023, the company was in compliance with all financial covenants, including its Secured Leverage Ratio and Minimum Liquidity requirements148212 - On November 7, 2023, the company entered into a Third Amended and Restated Credit Agreement. Effective January 31, 2024, this amendment will reduce the revolving loan facility borrowing limit and increase quarterly term loan amortization payments214216243 Note (14) Segment Information The company operates two segments, Satellite and Space Communications and Terrestrial and Wireless Networks, with the Satellite segment contributing higher net sales and operating income in Q1 FY2024 Segment Performance (Three Months Ended Oct 31, 2023) | Metric | Satellite & Space | Terrestrial & Wireless | Unallocated | Total | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $102.4M | $49.5M | - | $151.9M | | Operating Income (Loss) | $10.1M | $4.0M | ($12.1M) | $2.1M | | Adjusted EBITDA | $15.1M | $9.6M | ($6.4M) | $18.4M | - The Satellite and Space Communications segment offers satellite ground station technologies, troposcatter solutions, and space components290 - The Terrestrial and Wireless Networks segment provides next-generation 911, call handling, and trusted location and messaging solutions266 Part II. Other Information Risk Factors The primary risk factor is substantial doubt about the company's going concern ability due to insufficient liquidity and upcoming debt maturity, potentially impacting business relationships and financing - The company's current cash and liquidity projections raise substantial doubt about its ability to continue as a going concern4575 - Failure to remain compliant with financial covenants under the Credit Facility could trigger an Event of Default, leading to immediate acceleration and repayment of all outstanding debt82 - The perception of going concern risk may cause customers and vendors to alter business relationships and could negatively impact the company's ability to obtain financing or its stock price46